Texas data processing sales tax applies at the state rate of 6.25% plus local rates up to 2%, but only 80% of the charge is taxable. The other 20% is exempt by statute, so the effective state rate is 5% and the maximum combined effective rate is 6.6%. If you provide data processing in Texas, or sell into Texas from out of state above the economic nexus threshold, you need a sales tax permit, you have to apply the 20% exemption correctly on every invoice, and you have to know which digital activities the Comptroller treats as data processing.
How to Calculate the Tax
The math is simple. Multiply the charge by 0.80 to get the taxable amount, then apply your combined state and local rate to that figure.1Texas Comptroller of Public Accounts. Taxable Services – Section: Data Processing Services
On a $10,000 invoice at the maximum 8.25% combined rate, the taxable portion is $8,000 and the tax due is $660, not $825. Show the breakdown on the invoice: total charge, the 20% reduction, taxable amount, and tax collected. That transparency protects both you and your customer in an audit.
What Counts as Data Processing
Texas Tax Code 151.0035 defines data processing broadly. The statutory list covers word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and computerized data storage or manipulation. It also covers renting computer time, whether the provider or the customer runs the actual work.2State of Texas. Texas Tax Code 151.0035 – Data Processing Service
The Comptroller reads that definition to include most common cloud and digital services: web hosting, website creation and maintenance, cloud-based data storage and offsite backup, and converting paper documents or videotapes to digital files. Automated report generation, database management, and document formatting for clients qualify as well.1Texas Comptroller of Public Accounts. Taxable Services – Section: Data Processing Services
Software as a Service sits squarely inside this definition. Comptroller guidance names SaaS sellers and application service providers as data processing service providers, which sweeps in browser-based project management, CRM, accounting, email marketing, and similar subscription products. The 20% exemption applies to SaaS the same way it applies to any other data processing charge.
What Falls Outside the Definition
Not everything done on a computer is taxable data processing. The Comptroller looks at what the customer is really paying for. When a CPA prepares a return or an attorney drafts a document, the value is professional expertise and the computer is the tool. Those services are not data processing.
The statute also carves out specific exclusions. Medical transcription is not data processing. Payment processing services, including credit card processing, electronic funds transfers, and point-of-sale payment routing, were removed from the definition by amendment to Section 151.0035. Payment encryption services that comply with PCI Security Standards Council requirements are excluded as well.2State of Texas. Texas Tax Code 151.0035 – Data Processing Service
Which Local Rate You Charge
Texas uses origin-based sourcing for local sales tax when both seller and buyer are in Texas. The local rate is set by your business location, not the customer’s. State tax is a flat 6.25%, local jurisdictions add up to 2%, and the combined maximum is 8.25%.3Texas Comptroller of Public Accounts. Local Sales and Use Tax Collection – A Guide for Sellers If your office is in a city with a 1.5% city rate and a 0.5% transit authority tax, you charge that combined rate on Texas sales regardless of which Texas city the client sits in.
For remote sales into Texas from outside the state, sourcing flips to destination-based. The local rate at the customer’s location controls.
Out-of-State Sellers and the $500,000 Threshold
An out-of-state business selling data processing to Texas customers triggers a collection obligation once its total Texas revenue exceeds $500,000 in the preceding twelve calendar months. That threshold counts gross revenue from taxable and nontaxable sales into Texas, including handling fees, shipping charges, and sales for resale.4Texas Comptroller of Public Accounts. Remote Sellers
Once you cross the line, you must get a Texas sales tax permit and begin collecting and remitting state and local use tax no later than the first day of the fourth month after the month you exceeded the threshold. Cross the threshold in July, and collection must start by November 1. The obligation doesn’t disappear if you miss the window; penalties just start accumulating.
Getting a Sales Tax Permit
Apply through the Comptroller’s eSystems portal or by submitting Form AP-201 by email or fax. Either way, the permit typically arrives in two to three weeks, and there is no application fee.5Texas Comptroller of Public Accounts. Texas Online Tax Registration Application
You’ll need your Federal Employer Identification Number (or Social Security numbers for sole proprietors and each partner, officer, or director), your NAICS code, and your business location details. Most data processing businesses use NAICS 518210, which covers data processing, hosting, and related services. The Comptroller can require a security bond if owners have prior tax delinquencies. Once issued, the permit must be posted at your place of business.6Texas Comptroller of Public Accounts. Texas Sales and Use Tax Frequently Asked Questions
Filing, Discounts, and Penalties
The Comptroller assigns your filing frequency (monthly, quarterly, or annually) based on the tax you’re expected to collect, and notifies you when the permit issues. Monthly returns are due by the 20th of the month following the reporting period.
File and pay on time and Texas gives you a 0.5% discount on the tax reported. Prepay your estimated tax and you get the 0.5% timely filing discount plus an additional 1.25% prepayment discount.7Texas Comptroller of Public Accounts. Sales and Use Tax
Late filings and payments trigger a layered penalty:
- A $50 penalty for any return filed after the due date, regardless of the amount owed.
- A 5% penalty on unpaid tax when payment is 1 to 30 days late.
- A 10% penalty on unpaid tax when payment is more than 30 days late.
Interest starts 61 days after the due date at a rate that adjusts annually (7.75% for 2026, the prime rate plus one percentage point), calculated daily on the outstanding balance.8Texas Comptroller of Public Accounts. Interest Owed and Earned The 61-day grace period only applies to interest; the report penalty and the percentage penalties on unpaid tax start immediately.
Resale Certificates and Bundled Charges
Data processing bought for resale can be purchased tax-free with a resale certificate, but the rules are specific. The buyer must intend to transfer the service as an integral part of a taxable service they sell downstream, meaning the purchased service must be essential to performing the buyer’s own taxable service. A resale certificate also works when the buyer incorporates the data processing into tangible personal property that will be resold.9Legal Information Institute. 34 Texas Administrative Code 3.330 – Data Processing Services
Bundled invoices are where mistakes happen. When you sell data processing together with a nontaxable service under one charge, the Comptroller expects each component separately stated. If your books support a reasonable allocation between the taxable and nontaxable portions, you collect tax only on the data processing piece with the 20% exemption applied. If you can’t support a reasonable allocation, the entire bundled charge becomes taxable.10Texas Comptroller of Public Accounts. Taxable Services Clean invoice breakdowns directly control how much tax you owe.