The Canada Revenue Agency (CRA) is coming for Shopify (CA:SHOP).

The government agency responsible for collecting taxes from Canadian individuals and businesses has requested that Shopify hand over records for its Canadian stores from the past six years.

On June 23, responding on Twitter to the CRA’s request, Shopify CEO Tobi Lutke struck a defiant tone: “I don’t particularly want a fight with the CRA (Canada’s tax authority)- but we got asked to backchannel them 6 years of records for all Canadian Shopify stores. This feels like low-key overreach to me. We will fight this,” Lutke tweeted.

While it’s understandable Lutke doesn’t want to appear as if he and Shopify are willingly giving up this information to the CRA, it’s a fight that the company is likely to lose.

And that is bad news for Shopify stock. Here’s why.

Fighting Will Take Time and Resources

One of the reasons protracted acquisitions are often bad for businesses is that they require significant time and resources to complete successfully, taking management’s focus away from day-to-day operations.

Fighting the taxman over this request could have the same effect at a time when Shopify is trying to right-size its business through significant job cuts and a return to doing what it does best: help online sellers grow their businesses.

The move to sell its logistics division, while a costly retreat, was viewed by many analysts and retail experts as the right call.

“This strategy shift, while painful in the short-term due to writedowns and layoffs, will increase the company’s focus on selling more products through its platform,” the CBC reported Bloomberg Intelligence analyst Anurag Rana’s comments in May.

The reality is that Shopify has little chance of successfully fighting the CRA on this issue. Lutke is merely trying to appear sympathetic to its more than 121,000 Canadian stores nationwide.

While the CRA must file a notice with the Federal Court to get authorization to acquire the records, it’s not unusual for the tax authority to do this. In the past, it has sought the records of other e-commerce platforms, such as PayPal (US:PYPL) and eBay (US:EBAY).

The CRA filed a notice with the Federal Court in April to obtain these records.

“If the court grants the order, ordering Shopify to provide the records, data, Shopify must comply. If it doesn’t, there are potential criminal sanctions,” tax lawyer James Rhodes told The Globe and Mail. “If the court finds that the CRA is doing too broad a fishing expedition, it can refuse to grant the order sought. If this occurs, Shopify has no legal obligation to turn over the data,” the principal attorney at Taxation Lawyers said.

Given that the CRA’s job is to collect income taxes and GST/HST from these businesses, it’s hard to see the Federal Court denying the request.

Dashboards Detail

SHOP stock has been on a tear. Even with a pullback from 18-month highs earlier this month, the share price is up more than 70%, now even with consensus estimates of $83.71 a share. On Fintel’s Momentum quant dashboard, the shares score a very high 87.65.

Fund Sentiment is also high, at 81.27. That score, formerly the Ownership Accumulation score, is a proprietary quantitative model that ranks companies based on levels of ownership accumulation. To calculate the ranking, Fintel looks at two key factors: the change in the number of disclosed owners over the prior quarter, and the change in portfolio allocation of existing owners over the prior quarter.

To be sure, investors may have some concerns. On Fintel’s Short Interest dashboard, SHOP stock is flashing a Short Squeeze Score of 77.77, ranking it at 164th out of 9,801 stocks analyzed.

Recall, the measure is the result of a sophisticated, multi-factor quantitative model that identifies companies that have the highest risk of experiencing a short squeeze. The scoring model uses a combination of short interest, float, short borrow fee rates, and other metrics. The number ranges from 0 to 100, with higher numbers indicating a higher risk of a short squeeze relative to its peers, and 50 being the average.

Bigger Deal Than Experts Suggest

Most analysts believe that Shopify handing over these records to the CRA might be bad news for some customers, but it shouldn’t affect the platform’s reputation.

“Any risk to Shopify is low and more than likely there is greater risk to an individual merchant from a tax liability point of view,” The Globe and Mail reported the comments of Rick Watson, chief executive with RMW Commerce Consulting, an e-commerce consulting firm.

While this situation doesn’t appear to be a material problem for Shopify at the moment, until the CRA gets the data from the company and determines how many of the 121,000 stores will receive a tax audit, investors can’t be certain that the process won’t result in several stores shutting down, thereby reducing Shopify revenues.

In 2022, Shopify’s Canadian revenues were US$346 million, accounting for just 6.2% of its overall revenue. Were the same situation happening in the U.S. through the Internal Revenue Service, this matter would be considerably messier because the U.S. accounted for 66% of Shopify’s $5.6 billion in 2022 revenue.

This article originally appeared on Fintel

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