The cell surface proteoglycan, syndecan-1, is essential for normal epithelial morphology and function. Syndecan-1 is selectively localized to the basolateral domain of polarized epithelial cells and interacts with cytosolic PDZ (PSD-95, discs large, ZO-1) domain-containing proteins. Here, we show that the polarity of syndecan-1 is determined by its type II PDZ-binding motif. Mutations within the PDZ-binding motif lead to the mislocalization of syndecan-1 to the apical surface. In contrast to previous examples, however, PDZ-binding motif-dependent polarity is not determined by retention at the basolateral surface but rather by polarized sorting prior to syndecan-1's arrival at the plasma membrane. Although none of the four known PDZ-binding partners of syndecan-1 appears to control basolateral localization, our results show that the PDZ-binding motif of syndecan-1 is decoded along the biosynthetic pathway establishing a potential role for PDZ-mediated interactions in polarized sorting.