That diagram is used as an example for how to make your own VGA box, not a picture of how all vga boxes work.
Pin 6/7 both connect to gound, so one might say they are tied together (if using a multimeter on continuity test). But they are not litterally connected to each other as in that logic diagram.
As described in the FAQ on the site here:
http://arcadecontrols.com/arcade_consoles.shtml#dc2arcadeUse a multimeter to trace pins 6/7 on the AV connector side, to see where these wires connect to the VGA Box PCB inside. This is the one difficult part, since both 6/7 tie to ground, you still don't know which is which. Well you could trace pin 1 and then count over to the 6th wire on the connector of the PCB and then cut the 6th wire.
To verify you cut the correct wire, try using the vga box on a computer monitor (making sure the switch is set to PC). If you cut the correct wire, you should get no picture. If you still see a picture, then you cut wire 7 not 6. Resplice #7 back together and cut #6, and test again.
As for the toggle switch, its a simple SPST (single pole single throw) toggle switch with 3 terminal connectors. Attach wire 6 to the middle connector, and then run a wire from a ground point on the PCB to either of the other two outer connectors on the toggle.
Thats all there is to it.