I've been thinking about artistic merit a lot myself, recently, and how some of my own fics which might be consider hinky fit into it. More and more, I'm coming to see "artistic merit" as falling in a binary with a PWP--when the point is only to arouse, artistic merit is absent. In the case of my fic, for instance, I've used hinky sex as character development (to show off Snape's questionable ethics, for instance, or to explore a particularly dark reading of Filch) or for realism (because teens do have bad experimental sex, no matter what some conservative types would like us to think). These fics have "artistic merit," whereas PWPs (which I've also written, though not with any underage pairings) are all about the sex for the sex's own sake.
However, I also think that this binary only exists when you assume that writing about sex is automatically a bad thing, and that therefore descriptions of sex have to be justified "artistically." I could go on about the double standard for sex and violence here, but that's an old conversation; suffices to say that I like porn as much as the next person, and even if PWPs aren't necessarily artistic, they can still be well-crafted, which is another kind of merit. A third kind of merit is that people enjoy reading them, they produce positive karma--I think reagen_v once compared a good PWP to a kind of blessing, which I totally agree with. If that's not merit, I don't know what is.
All this is very difficult when applied to artwork, of course, and I don't pretend to be an art critic; however, I think when LJ accused Pondorosa and Elaboration of lacking "artistic merit," they weren't necessarily saying "your art is ugly," but rather, "you art is nothing more than smut." And in the case of any fancraft, I think it's harder for fandom outsiders to perceive the artistic merit because they're not engaged in the fandom or its conversations. All they see are the characters, with a non-fan's perceptions and prejudices about them, in a shocking situation, and they impose different assumptions about the intent of the author/artist on the text/image because they don't have the appropriate context. The Snarry pic that was labeled as "lacking artistic merit" was analyzed by icarusancalionhere, and clearly for a Snarry fan used to the context of the Snarry ship, it's a meaningful and expressive piece of art. For someone who's maybe seen half of an HP film, it's little Harry Potter getting sucked off by his teacher, and that's freaky and wrong. Artistic merit can't be judged without context, and that's why I think it's absurd for LJ to use it as a standard for banning journals when they clearly don't have members of fandom passing judgement.