Good topic Duke!
My idea of whether or not to allow proxies seems black and white in my mind:
I would allow proxies if:
-someone is testing out a new army or unit for playability.
-the models being proxied are of similar size and base the same way as the models they represent.
-it is clear what they represent.
-"counts as" models fit the above requirements and fit into the theme of that army.
-they are being used by a younger player who cannot financially afford the proper models.
I would not allow proxies if:
-the models are the wrong size and based improperly.
-they are contradictory to theme of the army.
-its an ongoing issue, one game is fine but after several games buy the models!
-it is in a tournament and not preapproved by the judges. Fun games are one thing but if you have the money to play in tournaments for prizes you have the money to buy the proper models.
WYSIWIG is the best policy. It eliminates cheating and confusion. At the start of the game explain anything that is not 100% WYSIWIG. Ask you opponent if its OK to use something, most often the answer is "Yes", but dont show up with beer bottles for drop pods, green army men glued to bases or falcons whittled out of packing foam, duct tape and toilet paper rolls and expect that to be alright, buy the freaking models!