It's when a person kills a prostitute (or runaway- someone nobody will miss), has sex with her, and buries the body. Some months later, they dig up the body and put their opened mouth between the deceased's legs while a friend jumps on her stomach. The woman's decaying insides (including the perpetrator's old sperm) spurt into his mouth.
As a threat- If you're not careful, I'ma mulch-bag your sister.
As an insult- You dirty mulch-bagger.
As an activity- "What'd you guys do last night?" "Just a little mulch bagging"