diff --git a/extensions/css-language-features/server/src/test/links.test.ts b/extensions/css-language-features/server/src/test/links.test.ts
index 02070b1b41d..fe359d62648 100644
--- a/extensions/css-language-features/server/src/test/links.test.ts
+++ b/extensions/css-language-features/server/src/test/links.test.ts
@@ -54,7 +54,7 @@ suite('Links', () => {
 	}
 
 	function getTestResource(path: string) {
-		return Uri.file(resolve(__dirname, '../../test/linkTestFixtures', path)).toString();
+		return Uri.file(resolve(__dirname, '../../test/linksTestFixtures', path)).toString();
 	}
 
 	test('url links', function () {
@@ -66,4 +66,14 @@ suite('Links', () => {
 			[{ offset: 29, value: '"hello.html"', target: getTestResource('hello.html') }], testUri, folders
 		);
 	});
+
+	test('url links', function () {
+
+		let testUri = getTestResource('about.css');
+		let folders = [{ name: 'x', uri: getTestResource('') }];
+
+		assertLinks('html { background-image: url("~foo/hello.html|")',
+			[{ offset: 29, value: '"~foo/hello.html"', target: getTestResource('node_modules/foo/hello.html') }], testUri, folders
+		);
+	});
 });
\ No newline at end of file
diff --git a/extensions/css-language-features/server/src/utils/documentContext.ts b/extensions/css-language-features/server/src/utils/documentContext.ts
index 7b253add20f..41c29989f02 100644
--- a/extensions/css-language-features/server/src/utils/documentContext.ts
+++ b/extensions/css-language-features/server/src/utils/documentContext.ts
@@ -7,6 +7,9 @@ import { DocumentContext } from 'vscode-css-languageservice';
 import { endsWith, startsWith } from '../utils/strings';
 import * as url from 'url';
 import { WorkspaceFolder } from 'vscode-languageserver';
+import URI from 'vscode-uri';
+import { join, dirname } from 'path';
+import { existsSync } from 'fs';
 
 function getModuleNameFromPath(path: string) {
 	// If a scoped module (starts with @) then get up until second instance of '/', otherwise get until first isntance of '/'
@@ -16,19 +19,14 @@ function getModuleNameFromPath(path: string) {
 	return path.substring(0, path.indexOf('/'));
 }
 
-function resolvePathToModule(_moduleName: string, _relativeTo: string) {
-	// if we require.resolve('my-module') then it will follow the main property in the linked package.json
-	// but we want the root of the module so resolve to the package.json and then trim
-	let resolved;
-	try {
-		// resolved = require
-		// 	.resolve(`${moduleName}/package.json`, { paths: [relativeTo] });
-		throw new Error();
+function resolvePathToModule(_moduleName: string, _relativeTo: string): string | undefined {
+	// resolve the module relative to the document. We can't use `require` here as the code is webpacked.
+	const documentFolder = dirname(URI.parse(_relativeTo).fsPath);
+	const packPath = join(documentFolder, 'node_modules', _moduleName, 'package.json');
+	if (existsSync(packPath)) {
+		return URI.file(packPath).toString();
 	}
-	catch (ex) {
-		return null;
-	}
-	return resolved.slice(0, -12); // remove trailing `package.json`
+	return undefined;
 }
 
 export function getDocumentContext(documentUri: string, workspaceFolders: WorkspaceFolder[]): DocumentContext {
@@ -59,7 +57,7 @@ export function getDocumentContext(documentUri: string, workspaceFolders: Worksp
 			// and [sass-loader's](https://github.com/webpack-contrib/sass-loader#imports)
 			// convention, if an import path starts with ~ then use node module resolution
 			// *unless* it starts with "~/" as this refers to the user's home directory.
-			if (ref[0] === '~' && ref[1] !== '/') {
+			if (ref[0] === '~' && ref[1] !== '/' && startsWith(base, 'file://')) {
 				const moduleName = getModuleNameFromPath(ref.substring(1));
 				const modulePath = resolvePathToModule(moduleName, base);
 				if (modulePath) {