I've always held the pedestrian view that whether Oz was all a dream or a real place was purposefully left ambiguous and up to each viewer to decide.
I've also always decided that Dorothy really went to Oz - just because that's the much more interesting movie in my opinion.
Everything that suggests it was a figment of her imagination can (very loosely) be explained. She wakes up in her bed because the magic of the ruby slippers sent her there. The Scarecrow, Tin Man, etc. all look strikingly like the people she knows in Kansas - well that's just coincidence. She is drawn up inside a tornado and, not only survives, sees other people in there. There's even two guys rowing a boat in the tornado... Well, it's a children's fairy tale kind of thing, I guess.
When you really think about it, it does start to sound crazy but children's movies often are.
But there is one aspect, in fact one shot, that indicates unequivocally that it is absolutely all a dream. Still within the cylinder of the tornado, there is a shot where Miss Gulch, riding on her bicycle, transforms into the Wicked Witch.
This one shot, this brief moment, absolutely can not be explained away. In the real world, this can not happen and can not be reconciled.
Well, let's see, maybe Miss Gulch was always the Witch and now we're just seeing her transform using her magic. But the Wicked Witch doesn't just show up in Oz the day that Dorothy does, she's pre-existed there for years. Well, maybe she's lived in both dimensions and lived parallel lives. But Miss Gulch knows Dorothy and the Wicked Witch has no idea who she is when the meet for the first time.
No, the image you see above is the kind of thing that only happens in a dream. It was all a dream.
