The endoplasmic reticulum (ER) enzyme, 3-hydroxy-3-methylglutaryl-CoA reductase, catalyzes the production of mevalonate, a rate-controlling step in cholesterol biosynthesis. Excess sterols promote ubiquitination and subsequent degradation of reductase as part of a negative feedback regulatory mechanism. To characterize the process in more detail, we here report the development of a permeabilized cell system that supports reductase ubiquitination stimulated by the addition of sterols in vitro. Sterol-dependent ubiquitination of reductase in permeabilized cells is dependent upon exogenous cytosol, ATP, and either Insig-1 or Insig-2, two membrane-bound ER proteins shown previously to mediate sterol regulation of reductase degradation in intact cells. Oxysterols, but not cholesterol, promote reductase ubiquitination under our conditions. Finally, we show that ubiquitin-activating enzyme (E1) can efficiently replace cytosol to ubiquitinate reductase in response to sterol treatment, suggesting that other molecules required for ubiquitination of reductase, such as the ubiquitin-conjugating and -ligating enzymes (E2 and E3), are localized to ER membranes.