diff --git a/noxfile.py b/noxfile.py
index 628f1ed5..6c9dcabe 100644
--- a/noxfile.py
+++ b/noxfile.py
@@ -129,6 +129,7 @@ def tests(session: Session) -> None:
         session.install("dataclasses")
 
     try:
+        session.env.pop("TMPDIR", None)
         session.run("coverage", "run", "--parallel", "-m", "pytest", *session.posargs)
     finally:
         if session.interactive:
diff --git a/src/nox_poetry/core.py b/src/nox_poetry/core.py
index 9bd65dc5..a9eea35d 100644
--- a/src/nox_poetry/core.py
+++ b/src/nox_poetry/core.py
@@ -75,8 +75,13 @@ def build_package(session: Session, *, distribution_format: DistributionFormat)
     poetry = Poetry(session)
     wheel = Path("dist") / poetry.build(format=distribution_format)
     digest = hashlib.sha256(wheel.read_bytes()).hexdigest()
+    url = f"file://{wheel.resolve().as_posix()}#sha256={digest}"
 
-    return f"file://{wheel.resolve().as_posix()}#sha256={digest}"
+    if distribution_format is DistributionFormat.SDIST:
+        name = poetry.version().split()[0]
+        url += f"&egg={name}"
+
+    return url
 
 
 def install(
diff --git a/src/nox_poetry/poetry.py b/src/nox_poetry/poetry.py
index abb9f50e..73eb1c5a 100644
--- a/src/nox_poetry/poetry.py
+++ b/src/nox_poetry/poetry.py
@@ -69,3 +69,19 @@ def build(self, *, format: DistributionFormat) -> str:
         )
         assert isinstance(output, str)  # noqa: S101
         return output.split()[-1]
+
+    def version(self) -> str:
+        """Return the package name and version.
+
+        Returns:
+            The package name and version.
+        """
+        output = self.session.run(
+            "poetry",
+            "version",
+            external=True,
+            silent=True,
+            stderr=None,
+        )
+        assert isinstance(output, str)  # noqa: S101
+        return output.strip()
diff --git a/tests/functional/test_functional.py b/tests/functional/test_functional.py
index b4078481..58d120e9 100644
--- a/tests/functional/test_functional.py
+++ b/tests/functional/test_functional.py
@@ -1,6 +1,5 @@
 """Functional tests."""
 import nox.sessions
-import pytest
 from tests.functional.conftest import ListPackages
 from tests.functional.conftest import Project
 from tests.functional.conftest import RunNoxWithNoxfile
@@ -48,7 +47,6 @@ def test(session: nox.sessions.Session) -> None:
     assert set(expected) == set(packages)
 
 
-@pytest.mark.xfail(reason="https://github.com/cjolowicz/nox-poetry/issues/127")
 def test_install_local_sdist(
     project: Project,
     run_nox_with_noxfile: RunNoxWithNoxfile,
diff --git a/tests/unit/test_nox_poetry.py b/tests/unit/test_nox_poetry.py
index 701ad528..993281b6 100644
--- a/tests/unit/test_nox_poetry.py
+++ b/tests/unit/test_nox_poetry.py
@@ -1,12 +1,15 @@
 """Unit tests."""
+import pytest
 from nox.sessions import Session
 
 import nox_poetry
+from nox_poetry.poetry import DistributionFormat
 
 
-def test_install(session: Session) -> None:
+@pytest.mark.parametrize("distribution_format", [nox_poetry.WHEEL, nox_poetry.SDIST])
+def test_install(session: Session, distribution_format: DistributionFormat) -> None:
     """It installs the dependencies."""
-    nox_poetry.install(session, nox_poetry.WHEEL, "pip")
+    nox_poetry.install(session, distribution_format, "pip")
 
 
 def test_export_requirements(session: Session) -> None: