I send mine to Stern Tanning in Sheboygan Falls, WI. They have a website.
I've used other processors, but they are the cheapest, and I like the finished pelts the best.
I think the ones sent to your butcher end up in the rendering barrel. The large processors sell them - likely they end up being shipped to China/Mexico for processing into leather.
As a hint - talk to your butcher - you may be able to get him to save the skins from sheep he butchers and give them to you. If I were closer to my butcher, he's offered to do that for me in the past. They have to pay to get them hauled away. If you do that, make sure he knows to use the steer pattern to cut them, and gets them cooled ASAP so the wool does not slip and come off in patches.
Lisa at Somerhill
www.somerhillfarm.com