When checking if my CA refund is income, it asks if I took the standard deduction or itemized. Is this referring to the deduction on my 540 or on my 1040?

That's for your federal 1040 return.  If you took the Standard Deduction on Federal last year the state refund is not taxable and you don't even need to enter it.

A State Tax Refund is taxable if you itemized deductions on that prior year's federal return and took a deduction for state income taxes instead of the sale tax.  You got a deduction benefit for it so now you have to include it as income. If you took the standard deduction it is not taxable and you don't need to report it.