A man who claims to be Santa Claus (Douglas Seale) arrives at the Orlando International Airport in Florida. Ernest P. Worrell (Jim Varney) is working as a taxi driver. He takes a passenger to the airport, but speeds and the passenger falls out of the taxi. Ernest later picks up Santa Claus, who tells Ernest that he is on his way to inform a local celebrity named Joe Carruthers (Oliver Clark) that he has been chosen to be the new Santa Claus. Carruthers hosts a children's program named Uncle Joey's Treehouse in the Orlando area similar to Mister Rogers' Neighborhood or Captain Kangaroo with emphasis on manners and integrity with the catchphrase "They never get old. They always stay new. Those three little words, Please and Thank You".
While they are driving, a runaway teenage girl (Noelle Parker) who says she is named Harmony Starr joins Ernest and Santa in the cab. When they get to their destination, Santa possesses no legal currency (only play money), so in his giving Christmas spirit, Ernest lets him ride for free. The decision gets Ernest fired from his job. Back at the taxi garage, Ernest discovers that Santa left his magic sack behind in the cab, and Ernest begins a quest to find the old man and return it to him.
Santa arrives at the Orlando Children's Museum to talk to Joe, but is rudely interrupted and rebuffed by Joe's rude agent Marty Brock. Marty misunderstands Santa's name, thinking he said "Mr. Santos," and continues to call him by that name, even when Santa tries to correct him. Santa begins to worry as he then discovers he lost his sack, and becomes more discouraged as he realizes he is becoming forgetful in his old age (he's 151 years old, indicating he was born in 1837). Santa tries to explain his predicament, but Joe does not believe him and Marty has Santa arrested. Meanwhile, Ernest goes over to his friend Vern's house to put up a Christmas tree, much to Vern's distress (as with the original commercials that first introduced Ernest, the audience never sees Vern's face and only his point of view). Ernest poses as Astor Clement, an employee of the governor and Harmony as the governor's niece Mindy, and the two help Santa escape from jail by convincing the police chief that Santa believing that he is Santa Claus is "infectious insanity" and he must be taken to an insane asylum. Santa later explains to Ernest and Harmony that he was handed down the job of Santa Claus in 1889 from a German chap and has enjoyed it ever since but also explains that as time passes the magic grows weaker like a battery running out of energy. The only way to recharge it back to full strength is to pass it on to someone else which is why he must find Joe and make him the new Santa Claus and he must do it by 7pm or all hope is lost. Ernest disguises himself as an Apopka snake rancher (Lloyd Worrell from Knowhutimean? Hey Vern, It's My Family Album) who sneaks Santa into a movie studio and speaks to a security guard about delivering the snakes to people who direct horror films. Meanwhile, Marty presses Joe to quit his children's job, shave his beard, and instead land a part in a horror film titled Christmas Slay, a movie about an alien which terrorizes a bunch of children on Christmas Eve, which offends Santa so deeply he punches the director in the eye.
Santa tracks down Joe at his home. He explains about passing the position of Santa Claus over to him because if it's not, the magic will eventually die. Santa also explains that from Orlando, Joe must leave to deliver the presents by 7pm, if he leaves any later, he'll run into daylight before he finishes. Joe finally tells Santa, "Thanks...no thanks." Later on, however, Joe is overcome by conscience when the director of the movie wants him to use foul language, which he refuses to say in front of the kids on the set.
Ernest and Harmony (whose real name is later revealed by Santa to be Pamela Trenton) discover the magic power of Santa's sack, and immediately Pamela starts to abuse it. She steals the sack, and attempts to run away yet again. On Christmas Eve, however, her conscience prevails, and she rushes back to find Ernest and Santa and return the sack. Ernest meets up with Santa's helpers at the airport and they retrieve the reindeer and sleigh from the holding dock. Because they're short on time, Ernest decides to fly the sleigh to the children's museum, much to the helpers' objection. Having trouble controlling it at first, the reindeer and the sleigh fly all over the sky. While at the meeting, Joe looks out the window and sees the reindeer and sleigh flying and it convinces him that everything Santa told him is real and knows what he has to do. Joe turns down the acting job and leaves to find Santa.
Eventually, Joe hunts down Santa on Christmas Eve at 6:57 pm at the children's museum and tells Santa that he wants the job. Santa very pleased extends his hand to Joe and Joe takes Santa's hand, accepting the job, and is instantly transformed into the new Santa Claus. Joe uses his magic to make it snow in Orlando. Ernest and the helpers arrive at the children's museum at 6:58. Pamela has called her mother and has decided to come home. The new Santa decides to have Pamela be his special helper and then take her home and allows Ernest to be the driver for one night. The old Santa resumes his old identity, Seth Applegate and spends Christmas Eve with an elderly woman named Mary Morrisey who works at the children's museum. The new Santa takes off at 7 pm exactly to deliver the gifts. For the first year, however, Ernest gets to drive the sleigh.Jim Varney as Ernest P. Worrell, Astor Clement, Auntie Nelda, The Snake Guy
Douglas Seale as Santa Claus (a.k.a. Seth Applegate)
Oliver Clark as Joe Carruthers, the new Santa Claus
Noelle Parker as Pamela Trenton, a.k.a. Harmony Starr, Mindy
Gailard Sartain as Chuck (Storage Agent)
Bill Byrge as Bobby (Storage Agent)
Billie Bird as Mary Morrissey
Key Howard as Immigration Agent
Jack Swanson as Businessman
Buddy Douglas as Pyramus the Elf
Patty Maloney as Thisbe the Elf
Barry Brazell as Cab Passenger
George Kaplan as Mr. Dillis
Robert Lesser as Marty Brock
Zachary Bowden as Boy in the Train Station
This was the first major feature production filmed almost entirely in Orlando, Florida at the then-unfinished Disney-MGM Studios. Vern's house was actually a façade located on Residential Street at the park, and was part of the Studio Backlot Tour until it was demolished in 2002.
The remainder of the scenes were filmed in various locations in the greater Orlando area, including Orlando International Airport, Epcot Center Drive, Lake Eola, Church Street Station and Orange Avenue in Downtown Orlando, a toll booth on the Bee Line Expressway, the original Orlando Science Center which has since been replaced by a new facility (used as the "Orlando Children's Museum" in the movie), and the Orlando AMTRAK station. Scenes that take place in the movie studio and its hallways were shot at the facilities of the local FOX affiliate WOFL which in the mid-1980s had its own custom promo featuring the Ernest character. A small number of scenes were filmed in Nashville.
The movie was not a critical success, although it earned back its costs. In the opening weekend the film opened at #2 at the box office and grossed $5,710,734 from 1,634 theaters. Its final domestic grossing was $28,202,109 against only a $6 million budget. It currently holds a 38% rating on Rotten Tomatoes.