After a newsreel prologue stating that children around the world are preparing for the arrival of Santa Claus, a postman named Special Delivery "S.D." Kluger is introduced. When his mail truck breaks down, he tells the story of Santa in response to several letters sent from children.
The story begins in the gloomy city of Sombertown, ruled by the ill-tempered Burgermeister Meisterburger. A baby arrives on his doorstep with a name tag reading "Claus" and note requesting that the Burgermeister raise the child. He then orders his henchman and lawkeeper Grimsley to take the baby to the "Orphan Asylum".
On the way there, a gust of wind blows both sled and baby to the Mountain of the Whispering Winds, where the animals hide him from the Winter Warlock and take him to the Kringle elf family. Led by their matron, Tanta Kringle, they adopt the baby and name him “Kris”. A few years later, Kris hopes to restore the Kringles' title as the "first toymakers to the king.”
When Kris is old enough, he volunteers to deliver the toys to Sombertown. Meanwhile, the Burgermeister, after tripping on a toy wooden duck, causing him to fall down a flight of stairs and suffering a leg injury, bans all toys in the town, declaring that anyone found possessing a toy will be arrested and thrown into the dungeon. On his way to Sombertown, Kris meets a lost penguin whom he names Topper. In the town, he offers toys to two children washing their stockings by a water fountain. As the children are about to play with the toys, Kris is stopped by Miss Jessica, their lovely schoolteacher, but she softens toward Kris when he offers her a china doll as a "peace offering". As Kris gives out more toys, the Burgermeister arrives and orders his guards to have all the children arrested, but Kris stops him and gives him a yo-yo. The Burgermeister at first happily plays with it, but when Grimsley reminds him that he is breaking his own law, the Burgermeister orders Kris captured. Kris and Topper manage to evade capture and run into the woods.
As Kris and Topper start their journey back to the Kringles, the Winter Warlock captures them with his tree monsters, but when Kris gives him a toy train as a present, the Warlock's evil exterior melts away and he befriends Kris. To repay him, Winter reunites Kris with Jessica with a magical crystal snowball, who informs him that the Burgermeister has destroyed all the toys and the children now request new ones. To protect the town from further toy deliveries, the Burgermeister orders all doors and windows to be locked. But Kris enters by the chimneys and places toys in the children's hung stockings.
The Burgermeister then sets a trap for Kris and Topper as he makes another delivery while his soldiers capture the Kringles and Winter. Jessica pleads with the Burgermeister to release her friends, but he refuses. Jessica determines that she belongs with Kris and goes to the prison, to rescue everyone. Jessica asks Winter to break everyone out but he sadly refuses, having very little magic left, save for some magic feed corn which enables reindeer to fly. With the reindeer's help, the entire group escapes.
After months as an outlaw and discovery that their home was destroyed by the Burgermeister's guards, Kris grows a beard as a disguise. After Tanta suggests he return to his original name "Claus" for safety, Kris marries Jessica. After the wedding ceremony, the group travels to the North Pole to build a castle and toy workshop.
As the years pass and Kris and Jessica grow older, Kris continues to travel only at night, as he's still considered an outlaw. Eventually, the Meisterburgers died off and lost power over Sombertown and most of the laws were deemed ridiculous and revoked as Kris's legend goes worldwide, and he's deemed a saintly figure, becoming Santa Claus. As the years pass, Santa becomes unable to fulfill all the toy requests throughout the year and announces to Jessica that he will be limiting his trips to one night a year: Christmas Eve. As Santa prepares to head out on that night, Winter tells him that he has regained his magic and can guarantee a white Christmas.
After the story, S.D. Kluger suddenly realizes that it's getting late and remembers that he still has to deliver the letters to Santa and leaves for the North Pole with Topper, Winter, the Kringles, and a parade of children, singing "Santa Claus Is Coming to Town" during the credits while Santa and his wife are seen silhouetted in an upstairs window as Jessica helps puts on his hat and Santa steps out of his castle, smiling and waving goodbye to the viewers.