It narrows an earlier decision of the Los Angeles District Court in 2012 to strike down the entire act as unconstitutional.
California is the only state in the US that has law similar to the Artist Resale Right laws in the EU, providing artists with a cut of the proceeds when their work is sold on the secondary market.
The long-awaited decision as to its validity came in response to a class action filed in November 2011 by a group of powerful American artists against Christie's, Sotheby's and eBay.
They complained that the auction houses routinely violated the 38-year-old act by helping Californians dodge the levy when they sold pictures in New York.
In 2012 lawyers for the auction houses successfully argued that the CRRA violates the Commerce Clause of the US Constitution because it is an attempt by one state to control commerce outside its borders.
On this point the panel of three judges at the US Court of Appeals for the Ninth Circuit reached the same conclusion.
Their May 5 findings stated: [Sales made outside California] have no necessary connection with the state other than the residency of the seller.
For example, if a California resident has a part-time apartment in New York, buys a sculpture in New York from a North Dakota artist to furnish her apartment, and later sells the sculpture to a friend in New York, the Act requires the payment of a royalty to the North Dakota artist. This is even if the sculpture, the artist, and the buyer never travelled to, or had any connection with, California.
However, unlike the District Court, the Appeals panel did not deem the whole act to be unconstitutional.
It said if the clause regulating out-of-state sales was removed, then the rest of the act could stand. The law now reads: "Whenever a work of fine art is sold and . . . the sale takes place in California, the seller or the seller's agent shall pay to the artist of such work of fine art or to such artist's agent 5% of the amount of such sale."
California-based sellers can now choose between the convenience of a local sale incurring the levy and selling tax-free elsewhere.