I believe that if you're making jammies for your own kids and aren't going to sell them, you can use any fabric you like. But if you're going to sell them, you must follow FCC law that states any sleepwear up to childrens size 14 must either be flame retardant or snug fitting.
The only place I've found flame retardant fabric (and some of it is extremely soft and cozy!) is at JoAnn Fabrics. Their brick & morter store .. not the on-line store.
Hope that helps!