Why do people always say "That's what she said.."?

It’s really part of an older English joke.

The UK version of The Office used the first part of the joke with the character David Brent, while the US version of The Office used the latter part of the joke with the character of Michael Scott, and it caught on.

I always hear it mostly used when people are referring to a dirty joke. Like if someone said something that wasn’t supposed to come out sexually and instead it comes out that way. Then they always say “that’s what she said”

It’s a pretty old joke that became a running gag on The Office.
People who think that kind of thing is funny are pretty thick.

that’s what she said

I think it’s related to the term Blabber Puss.

that just… that just sounds funny

Its an quick opportunity to make a gag out of casual conversation that didn’t begin that way. Such as Two GI’s standing next to a bomb crater and one guy says “wow that’s a wide hole.” the other one who then is almost obligated to say, “that’s what he said.” Not a good example I know but it can be used to defuse tension.

This is a really old joke. I’m not sure when it started. It reminds me of the joke for fortune cookies where you just add the words “in bed” to the end of whatever it says. It can be really amusing how it changes the meaning. A simple yet effective attempt at humor, although slightly sophmoric. Biut then,who cares, as long as you get a good laugh out of it right? As far as the “that’s what she/he said” joke, my boyfriend in college’s roommate used to do it to me all the time. Almost anything you say can become a sexual double entendre with the addition of that phrase! It became ridiculous to the point where I could not say anything that could not be turned into a sexual comment. As you can imagine it got a little annoying at times. I think he wanted to embarrass me or something. That’s why he got a kick out of doing it.

Enthusiasm for cliches?

It’s always used to poke at a sexually implied double entendre. It’s not a new thing, the original expression was “said the actress to the bishop” and used just the same.

“I’m gonna go to the bar and grab a stiff one.”
“That’s what she said.”