Before Sandpoint was discovered by the timber industry, the Salish Tribes, specifically the Kalispel and the Kootenai built encampments on the shore of Lake Pend Oreille every summer, fished, made baskets of cedar, and collected huckleberries before returning to either Montana or Washington in the fall. The encampments ended before 1930.

The region was extensively explored by David Thompson of the Northwest Company starting in 1807. Disputed joint British/American occupation of the Columbia District led to the Oregon boundary dispute. This controversy ended in 1846 with the signing of the Oregon Treaty, whereby Britain ceded all rights to land south of the 49th parallel.

In the 1880s the Northern Pacific Railroad brought European and Chinese settlement to the area.

In August 1888, twenty-nine year old author and civil servant Theodore Roosevelt, visited Sandpoint on a caribou-hunting trip in the Selkirk Mountains. Roosevelt documented what a rough-and-tumble environment "Sand Point" was at that time (and for many decades following).

Sandpoint was officially incorporated in 1898.

Timber harvesting and railroads drove the economy for nearly a century after as lumberjacks moved in from the over-harvested Great Lakes region. Several lumber companies operated in the region from as early as 1896 to present. The most notable company was the Humbird Lumber Company that operated from 1900 to around 1944. The lumber companies bought land from the Northern Pacific Railroad and built a major mill at Sandpoint and adjacent Kootenai. Lumber-company-owned railroads extended into many of the local drainages, Grouse Creek, Gold Creek and (Rapid) Lightning Creek. Although the trees were never exhausted in the area, Humbird Lumber suffered and finally succumbed to the low timber prices of the Great Depression.

"Stump ranches" were sold by Humbird to many families who slowly cleared much of the valley land of tree stumps. Farming and ranching became the third business behind lumber and railroads prior to the "discovery" of Lake Pend Oreille as a sports fishery in the 1950s. The economy was given a boost during World War II from Farragut Naval Station, located in Bayview, Idaho, a training center for the US Navy located at the southwestern end of Lake Pend Oreille.

The opening of Schweitzer Mountain Resort in 1963 turned the area into a year-round tourism destination. The beauty of the surrounding Selkirk and Cabinet Mountains and Lake Pend Oreille have kept Sandpoint a tourist favorite for water sports, hunting, hiking, horseback riding, fishing and skiing.

In the 1980s and 1990s nearby Coeur d'Alene and Hayden Lake attracted nationwide publicity when white supremacist Neo-Nazi groups (most notably the Aryan Nations) set up headquarters in the area. Many Sandpoint residents reacted negatively to such groups; some formed the Bonner County Human Rights Task Force in opposition. In 2001 the Aryan Nations lost a lawsuit filed against them. The lawsuit bankrupted the organization and forced them to give up their Hayden Lake property and disband.

In August 2006, Sandpoint and the Panida Theater were host to the first ever International Film Festival in Northern Idaho. The Schweitzer Lakedance International Film Festival, as it is now known, held the second iteration of this film festival September 9th-16th, 2007. With outdoor independent film screenings at the scenic Sandpoint City Beach and the Historic Panida Theater, and multiple workshops and panel discussions, Sandpoint now hosts the largest film festival in the Inland Northwest. This festival, along with The Festival at Sandpoint, and Lost-in-the-50's, Sandpoint Winter Carnival among other events, continue to build Sandpoint's reputation of being an arts and culture capital of Idaho and the Inland Northwest.