I always associate the phrase "that's gay" with the South Park series. Here is an extract from an interview with the creators of South Park:
Sometimes the show is so perfectly offensive it seems like the people in charge of standards aren’t paying attention. Like, Oh, it’s just those crazy kids at South Park! Does the show get a pass?
MS: We got one note last week. This character says, “No more blowing guys on Colfax Avenue for a pint of vodka for this cowboy!” And they’re like, Can’t say “blowing.” But we begged and they said okay. Did you see the one where the Virgin Mary was bleeding out of her ass? A lot of times, when the whole show hinges on one thing, we’ll tell the network the idea first, to make sure they’re not gonna pull it on us. They had some comments on that one. They didn’t want it to look like a butt. And they didn’t want anybody putting their finger in the butt. We don’t set out to offend people. But sometimes, it’s like when you flip off the principal and he doesn’t care. You’re like, You’re supposed to care about that. We absolutely get a pass.
TP: We’re almost disappointed when we don’t hear from anyone. The notes are really inconsistent. In the first year, they’re like, “You can’t say ‘fag.’ There’s no way. And you can’t say, ‘That’s gay,’ because it’s offensive to homosexuals.” It’s like, Yeah, but that’s how kids talk. Finally, Mr. Garrison could say ‘fag’ because he said, “I’m gay. That means that now I can say the word fag. ” Now, nine years later, Garrison can scream, “We’ll see about this, you fudge-packing fags!” to two gay people who want to get married. It’s funny to watch the evolution. I don’t know if evolution is the right word, but it’s funny.
So that's how they rationalise it --i.e. they is no intention to cause offence. The slang is irrational and random, as it were. In other words... it's just a joke? Then again it could be argued that the producers of SP are playing with fire insofar as there is sometimes a fine line between jokes and insults.