Lysosomal lipid accumulation, defects in membrane trafficking and altered Ca²⁺ homoeostasis are common features in many lysosomal storage diseases. Mucolipin transient receptor potential channel 1 (TRPML1) is the principle Ca²⁺ channel in the lysosome. Here we show that TRPML1-mediated lysosomal Ca²⁺ release, measured using a genetically encoded Ca²⁺ indicator (GCaMP3) attached directly to TRPML1 and elicited by a potent membrane-permeable synthetic agonist, is dramatically reduced in Niemann–Pick (NP) disease cells. Sphingomyelins (SMs) are plasma membrane lipids that undergo sphingomyelinase (SMase)-mediated hydrolysis in the lysosomes of normal cells, but accumulate distinctively in lysosomes of NP cells. Patch-clamp analyses revealed that TRPML1 channel activity is inhibited by SMs, but potentiated by SMases. In NP-type C cells, increasing TRPML1's expression or activity was sufficient to correct the trafficking defects and reduce lysosome storage and cholesterol accumulation. We propose that abnormal accumulation of luminal lipids causes secondary lysosome storage by blocking TRPML1- and Ca²⁺-dependent lysosomal trafficking.