Ubiquitination, deubiquitination, and the formation of specific ubiquitin chain topologies have been implicated in various cellular processes. Little is known, however, about the role of ubiquitin in the development of cellular organelles. Here, we identify and characterize the deubiquitinating enzyme AMSH3 from Arabidopsis thaliana. AMSH3 hydrolyzes K48- and K63-linked ubiquitin chains in vitro and accumulates both ubiquitin chain types in vivo. amsh3 mutants fail to form a central lytic vacuole, accumulate autophagosomes, and mis-sort vacuolar protein cargo to the intercellular space. Furthermore, AMSH3 is required for efficient endocytosis of the styryl dye FM4-64 and the auxin efflux facilitator PIN2. We thus present evidence for a role of deubiquitination in intracellular trafficking and vacuole biogenesis.