It has previously been demonstrated that rabbit tracheal epithelial cells in primary culture undergo terminal differentiation at confluence to yield cornified cells much in analogy to epidermal keratinocytes and that one biochemical marker of this process seems to be the accumulation of cholesterol sulfate by the cells. The current work addresses the possible causes of this accumulation. Our studies show that the stimulation of cholesterol sulfate is paralleled by an increased activity of the biosynthetic enzyme cholesterol sulfotransferase. Squamous differentiated cells exhibited 20- to 30- fold higher levels of this enzyme activity than that in undifferentiated cells. As with other markers of squamous cell differentiation, the increase in cholesterol sulfotransferase can be prevented by the inclusion of retinoids in the cell cultures medium. Inhibition of sulfotransferase levels can be observed at concentration of retinoic acid as low as 10-11 M. The enzyme activity is optimal at pH 7 in buffers containing 0.2 M NaCl and 0.01% Triton X-100. Apparent Michaelis constants for the substrates 3'-phosphoadenosine-5'-phosphosulfate and cholesterol are 1 μM and 0.6 mM, respectively. Our results indicate that the increase in cholesterol sulfotransferase is the proximate cause for the accumulation of cholesterol sulfate in rabbit tracheal epithelial cells during squamous cell differentiation.