Because it's impractical to create a TOS that defines all possible ways they might need to use that data in order to provide the service (from any court's viewp

Because it's impractical to create a TOS that defines all possible ways they might need to use that data in order to provide the service (from any court's viewpoint) but also explicitly carve out that usage. If re-using the code as you posit is indistinguishable (legally) from a valid use of the data they need in order to provide the service, they're not going to carve it out of the TOS. It's better to not attempt that, and let you (as the customer) pick if you're okay with that. If you find the risk unacceptable, don't use the service. To some degree that's a better outcome than exposing the host to a ton of legal risk.