The film I have used is clear. When applied, it's almost impossible to see, but even if seen, it's no different than a sticker on the side. I do tend to keep it small, less than the diameter of the wheel so it is tucked nicely inside, maybe only 1/2" in total length, centered on the axle hole; however, there is nothing wrong running it down the side of the car. There are other PTFE films that are milky in appearance. For those, I think I would run it down the side and claim its decoration, but again, it's not a washer, so it is legal. As for polishing, everyone polishes differently using different methods. And yes, I too believe everything can be polished to a slicker surface. Like people have said - don't over think it and just let it rip.
As far as the rules go, those that are fast will always be fast and have the ability to build a car to any rule set. It's not just what the rules say, but what they omit. If they were truly eliminating a friction plate, they would need to specify the wheel must touch the wood or say something like "no foreign material can be installed on the side of the car other than wheels and axles." I have heard many say there is more cheating in PWD racing than there is in NASCAR, but in this instance, I do not consider PTFE film to be a cheat. You are building to the rules given and taking advantage of an oversight or omission (does not matter which it is).