Texas Is Rethinking Its Sales Tax on Data Processing Services
What the data processing services sales tax covers
Texas has taxed data processing services for a long time, and the definition is broader than the name suggests. It reaches computerized data entry, storage, and retrieval, payroll and business accounting done by an outside service, credit card and payment processing, website hosting, and a long list of things that happen when a computer handles someone else’s information for a fee. The one break built into the statute is a twenty percent exemption, so the tax lands on eighty percent of the charge. For most buyers that detail is invisible, because it shows up as a line on an invoice they never question.
The friction came from a 2025 update to the Comptroller’s rule on these services. The amended rule sharpened how the state decides what counts as taxable data processing, and in doing so it swept in charges that a lot of businesses never treated as taxable before. Marketplace and platform fees are the clearest example. When a restaurant pays a delivery app a cut on every order, part of that fee can be treated as taxable data processing. When a physician’s office pays to access patient records through an electronic system, the same logic can apply. The rule did not invent a new tax. It stretched an old one over transactions that had grown up since the definition was written.
Why the Comptroller called a roundtable
Huffines took office in 2026 and has been branding his early moves as a Taxpayer First Project. The September 3 roundtable fit that. He pulled in marketplace sellers who use Amazon, eBay, and Etsy, restaurant owners paying delivery-platform fees, and physicians dealing with records-access charges, and the through-line was the same complaint: a tax written for old-style data processing is now landing on the ordinary cost of running a modern business. His conclusion, that the state needs to review how the tax is applied, is not a rule change and does not undo anyone’s liability. It is a signal from the person with the authority to propose one.
A signal from a Comptroller is not a refund. Until the rule is actually amended or the legislature acts, the data processing tax applies exactly as it does today, and a business that stops collecting or paying it on the strength of a press release is taking the risk itself. The right response to a review is to get your own position straight, document how you are treating these charges, and be ready to move if the rules change, not to assume the change already happened.
This is the same fight playing out in other states
Texas is not alone in trying to tax the digital economy with tools built for something else. California is moving to tax software and digital products, a shift we wrote about when it landed. The pattern is consistent: states see revenue in the services that run modern commerce, the definitions are old, and the result catches businesses that never thought of themselves as buying or selling a taxable service. For a company operating across state lines, the lesson is that sales tax on services is now a moving target in more than one place at once, and the safe assumption is that a charge which looks untaxable today may not stay that way.
Where this reaches our clients
Plenty of our New York clients have Texas in the mix, whether they moved there, sell there, or run an entity with Texas customers. The data processing tax reaches them in a few specific ways.
Online sellers and platform businesses
If you sell through a marketplace or run one, the fees flowing back and forth may carry Texas data processing tax on the portion tied to computerized handling of orders and data. This is a sales tax question, not an income tax one, and it turns on how the charges are described and sourced. We keep that straight as part of the bookkeeping for clients whose businesses we already handle.
Owners who relocated to Texas for the income tax
People move to Texas because it has no state income tax, and then meet the state’s sales and franchise taxes on the way in. The data processing tax is one of the surprises, because it lands on services a business consumes rather than on its profit. Weighing the full Texas tax picture against the income tax you left behind is exactly what belongs in tax strategy planning before a move, not after.
Professional practices with Texas operations
Medical, legal, and other practices that pay for records access, hosting, or outside data services can find those charges taxed in ways they did not expect. If the entity files a Texas franchise return through us, the sales tax treatment of its vendor charges is part of the same return conversation.
How we work with clients on this
For clients with Texas activity, we treat state tax as its own workstream rather than an afterthought to the federal return. That means knowing which of a business’s charges are exposed to the data processing tax, keeping the records to support how those charges are treated, and watching a review like this one so a client is ready to claim relief the day it becomes available rather than months later. A pending review is worth tracking precisely because the businesses that adjust first are the ones that capture the benefit. Most of this reaches business owners and high-net-worth clients with multistate operations. The rest of our commentary on state and local tax news lives in the Reeder’s Digest.
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Frequently Asked Questions
What did the Texas Comptroller announce on September 3?
Comptroller Don Huffines hosted a small business roundtable focused on the Texas data processing services sales tax, bringing in marketplace sellers, restaurant owners, and physicians to describe how the tax reaches their businesses. After hearing them, he said the state needs to take a hard look at how the tax is applied and framed it as part of his Taxpayer First Project. It is important to be clear about what this is and is not. It is a public signal from the official who administers the tax that the current reach may be too broad. It is not a rule change, a repeal, or a refund. The tax applies today exactly as it did before the roundtable. What changed is the direction of travel, and businesses with Texas exposure now have reason to expect a possible narrowing and to prepare for it.
What counts as a taxable data processing service in Texas?
The category is broad. It covers computerized entry, storage, manipulation, and retrieval of data, along with things like outside payroll and business accounting, payment and credit card processing, website hosting, and data conversion. The common thread is a computer handling someone else’s information for a fee. Texas exempts the first twenty percent of the charge, so the tax effectively lands on eighty percent of what you pay. A 2025 update to the Comptroller’s rule tightened the definitions and, in the process, pulled in charges that many businesses had not been treating as taxable, especially marketplace and platform fees and records-access charges. Whether a specific charge on your invoice is taxable depends on how the service is described and delivered, which is why two similar-looking vendor bills can be treated differently. That ambiguity is a large part of why the tax drew a roundtable.
Does this affect me if my business is based in New York?
It can, because sales tax follows the transaction, not your home state. If you sell to Texas customers, run a marketplace with Texas users, or operate an entity with Texas activity, the data processing tax can reach the charges tied to that activity regardless of where you are headquartered. Many of our New York clients have Texas in the picture because they relocated, expanded, or sell there, and the data processing tax is one of the costs they meet on the way in. The income tax advantages of Texas are real, but they come alongside sales and franchise taxes that a New York owner may not be watching for. The practical point is to know which of your charges have Texas exposure before an auditor tells you, not after.
Should I stop paying the tax now that a review is coming?
No. A review is not a change in the law, and acting as if the tax has already been narrowed is a real risk. Until the Comptroller amends the rule or the legislature acts, the data processing tax applies as it does today, and a business that stops collecting or remitting on the strength of a press release is exposed to back tax, penalties, and interest if the change never comes or comes in a different form. The productive response is to get your own treatment documented and defensible, understand which charges would benefit if the tax is narrowed, and be positioned to claim relief the moment it becomes available. Moving first when the rules actually change is where the benefit is, and that only works if your records are already in order.
How is this different from an income tax issue?
Sales tax and income tax work on different things, and the data processing tax is squarely a sales tax. Income tax falls on your profit at the end of the year. Sales tax falls on specific transactions as they happen, collected by the seller and remitted to the state, whether or not the business is profitable. That is why the data processing tax can sting even a company that is barely breaking even: it rides on the services the business buys and sells, not on what it earns. It also means the compliance lives in your invoicing and your vendor contracts rather than on your return. For a business with Texas activity, the two systems have to be handled together, because a decision that helps on one side can create exposure on the other, and only looking at both at once keeps the whole picture honest.
Can The Reed Corporation help with Texas sales and franchise tax?
Yes. For clients with Texas activity we treat state tax as its own workstream alongside the federal return. That includes identifying which of a business’s charges are exposed to the data processing tax, keeping the documentation to support how those charges are treated, preparing the Texas franchise return, and tracking developments like this review so you are ready to act when the rules move. We also help owners weigh the full Texas tax picture against the income tax they left behind, which matters most for people considering a move rather than reacting to one. If your business sells into Texas or you have relocated there, a consultation is the right first step, and we will tell you where your real exposure sits before it becomes a notice.