About Face? Texas Comptroller Signals Willingness to Walk Back Data Processing Tax Positions

Texas is one of approximately 15 states that impose sales tax on data processing services. Under Texas Tax Code Section 151.0035, "data processing service" is defined as "word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production ... or other computerized data and information storage or manipulation." The Comptroller's office has interpreted this definition and application of tax to services it considers to be data processing in its regulations at 34 Texas Administrative Code Section 3.330.

Increasingly Aggressive Interpretations

In recent years, the Texas Comptroller's office took an increasingly expansive view of what constitutes taxable data processing services. The agency began asserting that a wide range of modern digital services – including some software-as-a-service (SaaS) platforms and cloud computing services, as well as artificial intelligence (AI)-powered applications – fell within the scope of the tax, even when the "essence of the transaction" was something other than data processing.

The Comptroller's aggressive positions have been challenged in litigation, with some Texas courts pushing back on the Comptroller's ever-broadening interpretations. Those courts have emphasized that when data processing is merely incidental to a non-taxable service, the transaction should not be taxed. However, rather than accepting these judicial limitations, the Comptroller's office responded by pursuing regulatory amendments to implement its expansive position.

The Controversial 2025 Rule Amendments

Effective April 2025, the Comptroller adopted significant amendments to Rule 3.330. The amendments made several key changes designed to expand the reach of the data processing tax. Critically, for online marketplace platforms, the amendments reached beyond statutory authority to assert that tax applies to the fees charged to marketplace sellers – a controversial approach that arguably subjects marketplace fees to double taxation, first as part of the taxable price paid by the customer, then again as taxable data processing sold by the marketplace.

These and other changes in the rule amendments proposed by the Comptroller drew sharp criticism from the business community. The Texas Taxpayers and Research Association (TTARA) and other groups filed formal comments opposing the amendments, pointing out that they represented an unauthorized expansion of the tax base that could not be implemented without legislative action.

New Comptroller Signals Change of Direction

In a significant development, new Texas Comptroller Don Huffines has indicated a willingness to revisit those previous aggressive interpretations. On September 3, 2026, Comptroller Huffines hosted a small business roundtable specifically focused on the impact of the data processing tax rules. The roundtable brought together affected business owners to share their experiences and concerns directly with the Comptroller's office.

Following the roundtable, Comptroller Huffines issued a statement acknowledging the need to reexamine the interpretations adopted during prior administrations. Although specific changes have not yet been proposed, this announcement signals potential relief for the many Texas businesses that have been affected by prior Comptrollers' attempts to expand the scope of services subject to tax as data processing. Huffines was sworn in on August 1, 2026, after being appointed by Texas Gov. Greg Abbott. He will face Democratic state Sen. Sarah Eckhardt in the November 2026 general election for a full four-year term.

What This Means for Businesses

Businesses that provide, purchase or use digital services in Texas should closely monitor developments. Though the current rules remain in effect and are subject to challenge, Comptroller Huffines' willingness to engage with affected stakeholders suggests that modifications may be forthcoming. Companies facing ongoing audits or disputes related to data processing services may wish to consider how this evolving landscape affects their positions.

Holland & Knight's State and Local Tax Team will continue to monitor these developments and provide updates as the Comptroller's office takes further action. For more information about how potential changes could affect your business or how Holland & Knight can help you participate in the ongoing discussions at the Comptroller's office, contact the authors.

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