A fundamental goal of ecology is to understand what controls the distribution and abundance of species. Both environmental niches and trade-offs among species in dispersal and competitive ability have traditionally been cited as determinants of plant community composition. More recently, neutral models have shown that communities of species with identical life-history characteristics and no adaptation to environmental niches can form spatial distribution patterns similar to those found in nature, so long as the species have a limited dispersal distance. If there is a strong correlation between geographic distance and change in environmental conditions, however, such spatial patterns can arise through either neutral or niche-based processes. To test these competing theories, we developed a sampling design that decoupled distance and environment in the understory plant communities of an old-growth, temperate forest. We found strong evidence of niche-structuring but almost no support for neutral predictions. Dispersal limitation acted in conjunction with environmental gradients to determine species' distributions, and both functional and phylogenetic constraints appear to contribute to the niche differentiation that structures community assembly. Our results indicate that testing a neutral hypothesis without accounting for environmental gradients will at best cause unexplained variation in plant distributions and may well provide misleading support for neutrality because of a correlation between geographic distance and environment.