The interplay of sphingosine 1-phosphate (S1P) synthetic and degradative enzymes as well as S1P exporters creates concentration gradients that are a fundamental to S1P biology. Extracellular S1P levels, such as in blood and lymph, are high relative to cellular S1P. The blood-tissue S1P gradient maintains endothelial integrity while local S1P gradients influence immune cell positioning. Indeed, the importance of S1P gradients was recognized initially when the mechanism of action of an S1P receptor agonist used as a medicine for multiple sclerosis was revealed to be inhibition of T-lymphocytes’ recognition of the high S1P in efferent lymph. Furthermore, the increase in erythrocyte S1P in response to hypoxia influences oxygen delivery during high altitude acclimatization. However, understanding of how S1P gradients are maintained is incomplete. For example, S1P is synthesized but is only slowly metabolized by blood yet circulating S1P turns over quickly by an unknown mechanism. Prompted by the counterintuitive observation that blood S1P increases markedly in response to inhibition S1P synthesis (by sphingosine kinase 2 (SphK2)), we studied mice wherein several tissues were made deficient in either SphK2 or S1P degrading enzymes. Our data reveal a mechanism whereby S1P is de-phosphorylated at the hepatocyte surface and the resulting sphingosine is sequestered by SphK phosphorylation and in turn degraded by intracellular S1P lyase. Thus, we identify the liver as the primary site of blood S1P clearance and provide an explanation for the role of SphK2 in this process. Our discovery suggests a general mechanism whereby S1P gradients are shaped.