This plugin is GPL2, so you can package it with your theme, providing you include the relevant license information.
It would be better to leave it as a plugin rather than build it into your theme, then customers will continue to get updates etc. when the plugin is updated. Otherwise you will need to update your theme every time there's an update to the plugin to keep it current.
A good way to include plugins and ensure they're loaded with your theme, is to use the TGM Plugin Activation class, which you can find here: https://github.com/thomasgriffin/TGM-Plugin-Activation
That class will actually allow you to use the plugin directly from the directory too! I made a brief intro video on how to use the class here: http://wp.tutsplus.com/articles/intro-to-tgm-plugin-activation-class-for-wordpress/