The former Everton striker, who spent last season on loan at the John Smith's Stadium, joins the Championship outfit for an undisclosed fee.
"James's arrival is a significant signing for the club and one that I know our supporters will be very pleased with after his excellent debut season in a Huddersfield Town shirt," said Huddersfield boss Mark Robins.
"Equally, I'm delighted that we have secured his services. The exciting thing is I believe there is even more to come from James.
"He is only 24 and although he already has excellent qualities in terms of strength, pace, work rate and much more, I believe he will have learned from the games he played last season and we will benefit from his knowledge and understanding of the style of football we want to play here."
Vaughan, who scored 14 goals in 37 appearances for Huddersfield last season, has signed a three-year contract.