A reply to a friend or acquaintance's statement or comment that could be comparable to those of Charlie Sheen, just like 'that's what she said' is used after someone makes a comment that could easily have sexual connotation in a different context!
The best opportunity to say 'That's what Sheen said!' is after a comment containing a word, group of words or reference made famous by Charlie Sheen (or relevant situation) is brought up in a conversation.
Dan - Hey, I just need to sink the 8ball and this game is over.
Pete - "That's what Sheen said!"
Jen - You totally poked me with that shrimp fork
Alex - "That's what Sheen said!"
Jeff - That chick has gone completely bipolar with her text messages
Andy - "That's what Sheen said!"