California's Senate rejected the bill by a 21 to 14 vote two months after the Assembly passed the legislation in June 2010.
The plastic bag ban, which would have included grocery stores, convenience stores and drugstores, found support from environmentalists while there were factions that opposed it too.
Environmental groups such as the Sierra Club encouraged Californians to contact their state senators to push for the measure, CNN reported.
Another green group Heal the Bay produced a mockumentary titled "The Majestic Plastic Bag" that charts the life of a plastic bag.
Governor Arnold Schwarzenegger had also reportedly spoken in support of the ban.
Among the agencies against the ban was American Chemistry Council, which slammed California Assemblywoman Julia Brownley, who proposed the bill.
"Her proposed legislation to ban plastic grocery bags in California ... is bad for the economy and bad for the environment: It will eliminate several hundred California manufacturing jobs and dismantle existing plastic bag recycling programs," the council said.