Rather than two firms selling products, a single firm can avoid sales tax, or VAT by having multiple departments handle both steps of the process.
A larger firm has an immediate benefit over a smaller firm which purchases from outside.
The more steps a good takes in being subjected to a tax, the more it will add to the bottom line.
Scalability of regulation compliance
A larger firm can more cheaply comply with the burden of regulations. E.g., the extra costs of employing lawyers and paper pushers for dealing with patent law, labor laws and so on.
A larger firm has more bargaining power (more employees) in acquiring health insurance and can compensate its employees with better benefits for its employees than a smaller firm can.
A larger firm can increase its capital goods so as to increase the productivity of the employee. The smaller firm which relies on more labor inputs is made uncompetitive by minimum wage laws.
Overall, seems solid, besides the point that sales tax is not paid along different steps in the production process - just at the end (if my understanding of the sales tax is correct). It is, however, a correct characterization of the VAT tax (again, I think).