2) Interactivity is a quality of sports and competition, not art.
This is perhaps the most important reason for distinguishing mass effect, or any video game, from art. The ability to interact with a medium, to change, play, or compete with it, excludes it from being art. Tennis is not art, it is a sport. The people who created tennis are not artists. Monopoly is a game, not art. The people who created monopoly are not artists. Admittedly those who created the board and figurines are artists, just as those who created the landscapes and textures in Mass Effect are artists. But Mass Effect itself is not art, it is a game that uses art to immerse. Monopoly is not art, it is a game that uses art to immerse. The inevitable response is "But a violin can be played, is a violin not art?" The difference here is that when a violin is played it creates art, music which can be recorded and enjoyed later. I would relate that to someone creating machinima from a game. Both music and machinima are art, but the violin and mass effect, the tools used to make the art, are not art in themselves simply for having been the tool used to create.
This is incorrect. There is no reason why Art cannot be interactive. You haven't explained why art must be fundamentally non-interactive.
The only fundamental quality of art is this: The evocation of emotion. The way to discover what Art is, is by asking why Art exists in the first place. Art, through all of the undisputed arts, is that which causes the experiencer of the art to have emotion. It is that which exists for the sole purpose of emotion. Sports ARE art, although they are bound by objective rules, (like points), such that it is easily objectively asserted that one player or another is "better" than another. It is difficult to objectively define "better" in the context of Music, Paintings, etc.