ABCG2 is an ATP-binding cassette (ABC) transporter that extrudes a wide range of xenobiotics and drugs from the cell and contributes to multidrug resistance in cancer cells. Following our recent structural characterization of topotecan-bound ABCG2, here, we present cryo-EM structures of ABCG2 under turnover conditions in complex with a special modulator and slow substrate, tariquidar, in nanodiscs. The structures reveal that similar to topotecan, tariquidar induces two distinct ABCG2 conformations under turnover conditions (turnover-1 and turnover-2). μs-scale molecular dynamics simulations of drug-bound and apo ABCG2 in native-like lipid bilayers, in both topotecan- and tariquidar-bound states, characterize the ligand size as a major determinant of its binding stability. The simulations highlight direct lipid-drug interactions for the smaller topotecan, which exhibits a highly dynamic binding mode. In contrast, the larger tariquidar occupies most of the available volume in the binding pocket, thus leaving little space for lipids to enter the cavity and interact with it. Similarly, when simulating ABCG2 in the apo inward-open state, we also observe spontaneous penetration of phospholipids into the binding cavity. The captured phospholipid diffusion pathway into ABCG2 offers a putative general path to recruit any hydrophobic/amphiphilic substrates directly from the membrane. Our simulations also reveal that ABCG2 rejects cholesterol as a substrate, which is omnipresent in plasma membranes that contain ABCG2. At the same time, cholesterol is found to prohibit the penetration of phospholipids into ABCG2. These molecular findings have direct functional ramifications on ABCG2’s function as a transporter.