Subsets of long-lived, tumor-initiating stem cells often escape cancer therapies. However, sources and mechanisms that generate tumor heterogeneity and drug-resistant cell population are still unfolding. Here, we devise a functional reporter system to lineage trace and/or genetic ablate signaling in TGF-beta-activated squannous cell carcinoma stem cells (SCC-SCs). Dissecting TGF-beta's impact on malignant progression, we demonstrate that TGF-beta concentrating near tumor-vasculature generates heterogeneity in TGF-beta signaling at tumor-stroma interface and bestows slower-cycling properties to neighboring SCC-SCs. While non-responding progenies proliferate faster and accelerate tumor growth, TGF-beta-responding progenies invade, aberrantly differentiate, and affect gene expression. Intriguingly, TGF-beta-responding SCC-SCs show increased protection against anti-cancer drugs, but slowercycling alone does not confer survival. Rather, TGF-beta transcriptionally activates p21, which stabilizes NRF2, thereby markedly enhancing glutathione metabolism and diminishing effectiveness of anticancer therapeutics. Together, these findings establish a surprising non-genetic paradigm for TGF-beta signaling in fueling heterogeneity in SCC-SCs, tumor characteristics, and drug resistance.