I believe it's an extended metaphor in which Tom's penis is a branding iron and the "flag T" is both what his brand looks like and the name of his imaginary ranch.
Tom says "This snatch is branded" while holding his penis; the insinuation is that his penis is a branding iron and he has branded the prostitute's vagina.
Al gets the joke and ask's Tom to put his "[branding] iron away now."
Tom replies "Ah, not yet"--meaning he isn't finished with the prostitute. Then says "Burned it at the flag T." I think what this means is that his saying his brand is a Flag shape with a T inside it.
My reasoning: there are ranches at which the brand was a letter inside a shape and the ranches were named for the brand. You can google "Circle K ranch," "Square H ranch," "Cross E ranch," or "Diamond M ranch" for examples. So maybe when Tom says "the flag T" he is imagining a ranch of his own at which animals are branded with a T (for Tom) inside a flag. So he burned it--the "whore's snatch"--at the flag T ranch. This is speculation--I could not find an example of a ranch called the "Flag [Letter] Ranch," but it is consistent with how other ranches were named.
Basically a very crude and misogynistic metaphor for having sex with a woman, which is in character for a member of Persimmon Phil's gang of road agents.