In my opinion there are a couple of valid reasons to use sandpaper.
- File down current calluses, therefore avoiding large calluses from getting snagged/pinching itself resulting in a flapper (ripped piece of skin only attached at a small point).
- Toughen up the skin, resulting in less sensitive and more durable skin.
When you are a beginner it will take time to develop the hard skin on your hands and finger tips. You will get flappers regardless of whether or not you are using sandpaper, the sandpaper will just help get that skin tougher faster.
Once you have hard skin I find sandpaper to be a great tool. Why? If you can't make it outside or head to the gym you can roll up some sandpaper into a ball and just play with it. This will keep the skin on your hands in tip top shape for when you get back climbing!
I also keep some on hand in case I get any sort of issue with my fingernails while climbing, I can then use the sandpaper to repair the issue.
When removing calluses go nuts until it's level or just slightly raised above the normal skin.
When playing with the ball of sandpaper or sanding your HANDS (ie. not removing callouses) you are not going crazy on high speed with a belt sander! You are just scuffing up your skin lightly by hand with approximately 60<->220 Grit Paper! I find 150 grit works great!
Useful Tip: If you're planning on getting onto a campus board shave those nails down with a file or sandpaper! You do not want long nails OR clipped too short!
With regards to the OP's question on practical benefit I would like to point out the following two photograph's of my hand. The first before using sandpaper, very difficult to climb, and the second 4 weeks after the first but using sandpaper, much easier to climb. The second is much dryer and tougher!