Rabbit tracheal epithelial (RbTE) cells in culture undergo terminal squamous differentiation characterized by enhanced transglutaminase activity, synthesis of specific keratins, and the formation of cross-linked envelopes. The expression of each of these markers of differentiation occurs spontaneously after the cells reach confluency, but this expression can be inhibited by the inclusion of retinoids in the extracellular medium. In the current work, we demonstrate that radioactive sulfate incorporation into the organic phase of a CHCl3/CH3OH (2:1) extract of RbTE cells increases 50- to 100-fold upon differentiation and that this accumulation can be completely blocked by the inclusion of retinoic acid in the culture medium. By the techniques of specific metabolic radiolabeling, thin layer chromatography, gas chromatography-mass spectrometry, and fast atom bombardment-mass spectrometry, the sulfated amphiphile was shown to be cholesterol 3-sulfate. Cholesterol sulfate accumulation begins 1 to 2 days after the RbTE cells reach the stationary phase of growth which is the same time that other differentiated functions begin to be expressed. The inhibition of accumulation by retinoic acid is concentration-dependent and half-maximal at 5 x 10-11 M. The relative efficacy of a series of synthetic retinoids in inhibiting cholesterol sulfate accumulation correlated with their binding to the cellular retinoic acid-binding protein. These data taken together indicate that cholesterol sulfate is a marker of squamous differentiation in RbTE cells in culture. Possible biochemical mechanisms of the regulation of cholesterol sulfate levels during differentiation are discussed.