Sulfation is an important biological process that modulates the function of numerous molecules. It is directly mediated by cytosolic and Golgi sulfotransferases, which use 3'-phosphoadenosine 5'-phosphosulfate to produce sulfated acceptors and 3'-phosphoadenosine 5'-phosphate (PAP). Here, we identify a Golgi-resident PAP 3'-phosphatase (gPAPP) and demonstrate that its activity is potently inhibited by lithium in vitro. The inactivation of gPAPP in mice led to neonatal lethality, lung abnormalities resembling atelectasis, and dwarfism characterized by aberrant cartilage morphology. The phenotypic similarities of gPAPP mutant mice to chondrodysplastic models harboring mutations within components of the sulfation pathway lead to the discovery of undersulfated chondroitin in the absence of functional enzyme. Additionally, we observed loss of gPAPP leads to perturbations in the levels of heparan sulfate species in lung tissue and whole embryos. Our data are consistent with a model that clearance of the nucleotide product of sulfotransferases within the Golgi plays an important role in glycosaminoglycan sulfation, provide a unique genetic basis for chondrodysplasia, and define a function for gPAPP in the formation of skeletal elements derived through endochondral ossification.