I used to have a really strict and complicated letter policy. Then I realized I had a bunch of band kids wearing athletic jackets. Even a benchwarmer who never sees game time qualifies for a letter.

We do a 3 point system. Marching, concert, marching counts for their 3 points and they get a letter for their 2nd year. Even a last-chair prop pusher gets a point for participating, just like the football benchwarmer. The policy says something about "satisfactory participation" for the season. In general they only lose the point if they don't complete the season due to grades or something else stupid.

For us a kid who advances to State in either TMEA or UIL Solo and Ensemble earns a letter, even if they are a freshman. You said your campus gives a letter to everyone on the team if the team makes State. I would match that policy and award the letter to everyone if you make State marching. I might still require them to finish the year and do concert.