Any show or costume of any kind should be age-appropriate, which is why we don't bring 5yr olds to adult-themed haunted houses or movies. I trust your judgment so I will assume the person wasn't just getting "extra" dressed up due to Halloween.
That said, I'm not sure if someone wearing drag/leather/spiked collar would be a "drag act" as much as it would be a some rando making a dubious wardrobe choice with a lenient boss--but then again, the adjective "dubious" is only set by the norms we've grown up with, and one thing we know for sure is that norms change with the times (e.g. tattoos). On a personal level (others might differ) my partner and I would be far more likely to let our kid (a 5yr old) hang with a leathered, spike-collar, “extreme” make-up, "drag-ey" fishnet, etc., coffee shop employee than with even the most milquetoast after-school bible reading group, where everyone dressed the same and acted even more similar.
As to telling your kids age-appropriate info, I get that. Perhaps you are speaking about external circumstances, but I don’t think anyone here judges you for the views you hold, as you haven't proven yourself in any way to be prejudiced or bigoted. And to be sure, everyone is entitled to what they do/don't want their kids exposed to and I wouldn't judge you for that, providing you don't judge me either (though societal and legal norms obviously set the boundaries on what might constitute "too extreme of an exposure").
There are tons of drag acts that aren't appropriate, and tons that are, such as many Lip-Sync shows on TV/internet. I was watching Monty Python reruns with my dad at age 7, which was pretty drag-ey. Was no big deal.