I'd meassure from the anus to the tip. might as well have a big one.
I'd be surprised if there was an "official" method! However, I suspect those who are pushing the ruler in until they hit the bone are bending the rules to try and get themselves an extra inch - measuring from the normal position of the skin seems reasonable to me. And in what position - the pointing-up direction it would normally sit at when erect, or held perpendicular to the body (which might give you a bit extra)?
Don't forget to allow for the 1/4" or so at the end of the ruler, before the markings start...
Frankly, if it's doing its job and making you and your partner happy, it doesn't really matter what numerical value you give to it ;-)