No one has actually answered Celbar's original question yet.
I am running into this issue now and as the CA tax instructions are worded, you appear to be completely correct: State Tax exempt DIVIDENDS should be subtracted on the CA INTEREST row (line 2).
Turbo Tax is reporting this in the CA DIVIDENDS row (line 3)
Doing it the CA way, one could easily have "negative CA interest", which conceptually seems weird. I wish we could get an actual CA tax professional to weigh-in. Please update this if you ever find an answer.
Practically, I'm *hoping* you can make an argument to the CA FTB either way if you ever get audited.
