I think what would work best is:

(I) Federal Government makes it legal for the states to make it legal.
(II) States make it legal
(III) Municipalities control zoning.

If a municipality doesn't want a sex trade they just don't zone any land as ok for brothel's.

I think trying to do it exclusively at the state level is an absolute disaster. Look at medical marijuana where the feds were going after state dealers for a long time. Even now that is a NAFTA lawsuit waiting to happen. A medical marijuana company in Vancouver for instance could sue the US under NAFTA for anti-competitive barriers relating to selling in California, the most significant of which is probably the fact that its illegal to transport across say Washington and Oregon.