Mutations in CLN3 lead to photoreceptor cell loss in CLN3 disease, a lysosomal storage disorder characterized by childhood-onset vision loss, neurological impairment, and premature death. However, how CLN3 mutations cause photoreceptor cell death is not known. Here, we show that CLN3 is required for phagocytosis of photoreceptor outer segment (POS) by retinal pigment epithelium (RPE) cells, a cellular process essential for photoreceptor survival. Specifically, a proportion of CLN3 in human, mouse, and iPSC-RPE cells localized to RPE microvilli, the site of POS phagocytosis. Furthermore, patient-derived CLN3 disease iPSC-RPE cells showed decreased RPE microvilli density and reduced POS binding and ingestion. Notably, POS phagocytosis defect in CLN3 disease iPSC-RPE cells could be rescued by wild-type CLN3 gene supplementation. Altogether, these results illustrate a novel role of CLN3 in regulating POS phagocytosis and suggest a contribution of primary RPE dysfunction for photoreceptor cell loss in CLN3 disease that can be targeted by gene therapy.