Grammatically speaking, people lined up—at the box office, the grocery check out, or the bank—are waiting in line. “In” is a preposition that, in this case, indicates inclusion. “On” has several meanings. The most relevant indicates contact with something and perhaps support: “Leslie is sitting on the chair.” These days, you’re only “on line” if you’re on the Internet, and even then, it’s spelled as one word (online) or, less frequently, hyphenated (on-line).
That being said, if you find yourself in a queue in New York City and the lady next to you is on her cell phone explaining where she is, you may very well hear her say she’s on line. She’s not talking about her cell phone’s Internet capabilities. She’s using a phrase that thousands of people from the Northeast of the United States use. This is a regionalism and it’s just one of many. Here are a few others: Carbonated beverages are often called “pop” in the Midwest and “soda” on the East Coast. You’ll hear “y’all” in the South and Midwesterners are known to say “you guys” in reference to more than one person, regardless of gender.
Stay true to your character, even if it means bending the rules of grammar.