*.txt files are opening in browser for all users. Is there a fix on the server level so that
*.txt files are prompted to open in Notepad?
The default association for such file types on the system is Notepad already.
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There is a dated answer stating that this is not possible. However you could try the following:
After confirming these, open Notepad in Windows. Go File > Open, and in the file selection window write the address to a path where you have a .txt-file hosted in SharePoint (e.g.
http://site/Documents/file.txt). After you have the .txt-file opened, you can close your Notepad, and restart your browser. By doing the file opening once this way, .txt-files may now be prompted to be opened with a client program (i.e. Notepad) when they are opened in SharePoint. I'd expect that the best results are achieved by using IE.
This was suggested in here: https://sharepointmaestra-public.sharepoint.com/Blog/Post/37/Opening--txt-Files-in-NotePad
Other than that I don't think there are many options for opening .txt-files in client programs directly through SharePoint. You can always open the file hosted in SharePoint by pasting its full URL to the file explorer's address bar though, but that's still quite manual approach.