"Kill" has quite a few meanings in colloquial English.
As Ruthi has said, it can be in reply to a joke. It can both be positive and negative. "You kill me" can be said in response to a good joke, or to a bad one - "you're killing me man..."
It comes out a bit sarcastic, a bit sardonic.
It's also seen to be used in forms like "killer" - "What a killer question", meaning "what a great question". "That's killer!" - "That's awesome!"