Scott Calvin is attending a large office party at his toy company, where he is winning an award for his salesmanship ability. As he drives home, he leaves a message for his ex-wife, Laura, apologizing for being late when she is dropping off their son Charlie, who is to spend Christmas night with him. When he arrives, he finds that Laura's new husband, Neil Miller, has explained to Charlie that there is no Santa Claus, and Laura and Scott get into an argument about it, much to Charlie's dismay. Scott's attempt to cook a nice Christmas dinner end up with him squirting a fire extinguisher at the turkey in the oven, so they go out to eat. The only place open is Denny's, where they find a full house of Japanese salesmen.
The waitress leads them to the room of Men Who Burned the Turkey and tells them that they are out of eggnog, out of chocolate milk, and out of apple pie. They return home and Scott reads "The Night Before Christmas" to Charlie and answers a barrage of questions from him about Santa's magical abilities, explaining at the end that he does believe in Santa. Charlie goes to sleep, but is awakened by a bump on the roof. He wakes up Scott, who goes outside and sees a man in a Santa suit on the roof.
He yells and the man slips and falls off the roof. Looking for identification, he finds a card instructing the finder to put on the Santa suit if anything should happen to him. They then notice a sleigh and reindeer on the roof, and the man's body disappears, leaving only the suit behind. Charlie climbs to the roof to pet the reindeer, forcing Scott to follow him.
They climb into the sleigh and accidentally start the reindeer moving, eventually landing on another roof. Scott, still in his underwear, is convinced to put on the Santa suit, whereupon he is dragged out of the sleigh and down the chimney by the sack of toys. Once inside, he leaves some presents but is chased back up the chimney by a large dog. They rush off, only to end up at the next roof.
This time, Scott is caught by a young girl sleeping on the couch. She tells him he is supposed to drink the milk, and he tells her sarcastically that he is lactose-intolerant. Scott eventually gets into the spirit and they spend the remainder of the night giving out presents. The reindeer then take them to the North Pole and disappear, while an elf opens a garage door for them. They are lowered into a gigantic toy workshop, where an elf named Bernard greets him as Santa. He gives Charlie a snow globe that shows Santa flying in his sleigh and sends him to get food.
Bernard explains that when Scott put on the Santa suit, he fell subject to the Santa Clause. By placing the card from the suit under a magnifying glass, Scott is able to read that putting on the suit obligated him under that clause to accept the job of Santa. Bernard tells Scott that he has eleven months to get his affairs in order and that he will be shipped the List. Scott asks what would happen if he didn't believe; Bernard explains that that would result in millions of disappointed children. Scott and Charlie are then escorted by Judy the elf to Santa's bedroom.
She brings Scott monogrammed pajamas ("SC") and explains to him that children don't need to see Santa's workshop to know that it's real, and Scott and Charlie fall asleep, waking in their own bedrooms. Scott is still wearing his monogrammed pajamas. Laura arrives to pick up Charlie, who tells her the events of the evening. Laura is annoyed with Scott for encouraging Charlie to believe in Santa. Later that year, Charlie's class does a Parent's Day.
He introduces Scott and explains that his job is being Santa Claus. Scott tries to explain his actual job as a toy salesman but Charlie insists that he is Santa Claus. They end up in the school counselor's office, who insists that Scott explain to Charlie that he is not Santa. Scott tries to comply, but Charlie refuses to accept it.
Laura finds Charlie in his room playing Santa; Neil challenges many of Charlie's beliefs, but Charlie refutes them all; Neil tells Scott that Charlie is conflicted and they wonder if it's best to stop letting Scott see Charlie. Eventually, at Scott's request, Charlie agrees to stop discussing Santa with others. Scott wakes up one morning, much heavier and with a heavy beard. He rushes to an office meeting, wearing the only thing that will fit him, a sweatsuit.
At the meeting, after a lunch where Scott orders hot fudge, extra dressing, cookies and other things, they demo an ad campaign showing Santa riding a tank. Scott objects strenuously, and suggests developing a more nurturing toy. Scott's boss orders him to get help. Scott gets heavier and heavier, with a fast-growing beard, although the doctor tells him he is as healthy as a horse.
Later, watching Charlie play soccer, a little girl begins giving him her Christmas list. Laura and Neil catch Scott with children lining up to see him, intensifying their concern. The List arrives, via Federal Express, with a note from Bernard instructing Scott to check it twice. Neil and Laura take Charlie to a counsellor with the intention of revoking Scott's visitation rights. They reminisce about their own Christmas disappointments. Laura wanted a Mystery Date board game, while Neil, at just three, wanted an Oscar Meyer Weenie Whistle. Neither believed in Santa Claus ever again. Scott's visitation rights are cancelled.
He goes to visit Neil and Laura anyway, and Charlie tells him that the important thing is that the kids get their presents. Charlie shows him the snow globe again, and when Scott asks for a moment alone with Charlie, Bernard appears. When Laura returns, Charlie, Scott, and Bernard have all disappeared. The police are called in, and begin arresting Santas all around the city. Meanwhile, the elves demonstrate some new, James Bond-ish technology to Scott, who is mostly worried about falling off roofs. Santa begins his rounds, including returning to the little girl who has made sure to provide soy milk for the lactose-intolerant Santa. When he returns to Neil and Laura's house, the police arrest him. Charlie is left on the roof.
When the elves lose contact with Santa, they deploy the Effective Liberation Fight Squad (ELFS), a team of commandos. They pick up Charlie, then confront the desk sergeant. "We're your worst nightmare," they tell him. "Elves - with attitude.
" They rip open Scott's cell door with tinsel, and return to Laura and Neil's house. Scott tells Charlie he has to stay with Laura and Neil. Neil and Laura begin to believe in Scott as Santa, and Laura burns her custody papers. As they say goodbye, Bernard appears to find out the delay. He tells Charlie that he can call back Scott by shaking the snow globe. The police return to the house just as Santa and his sleigh fly from the roof. As Scott leaves, he drops presents - a Weenie Whistle for Neil and a Mystery Date game for Laura.
Ten minutes later, Charlie calls Scott back with the snow globe and they take a final quick ride around the neighborhood..