This episode opens as the school children rehearse for their Christmas play. They are performing a Christian Nativity, and Kyle's mother, Sheila, is angered by the play because Kyle, a Jew, plays the role of Joseph (which would have technically been historically accurate). She demands that religious elements be taken out of the public school Christmas pageant. Kyle suggests the non-religious Mr. Hankey, the Christmas Poo as a replacement, but is dismissed.
Mrs. Broflovski's demands trigger uproar in the town, and so it is decided that anything offensive to anyone will be removed from the Christmas celebrations, including Santa Claus, wreaths, trees, stars, lights, and candy canes.
Meanwhile, Kyle feels low for being "a lonely Jew on Christmas," and is embarrassed by his mother's actions. That night, Mr. Broflovski convinces his son not to talk about Mr. Hankey anymore. Kyle was brushing his teeth in the bathroom when he turns to Mr. Hankey for solace, who, it turns out, is an actual piece of talking poo. Kyle tries to bring Mr. Hankey to the masses, but no one believes him when Mr. Broflovski discovered his son holding a piece of poo and the bathroom is in poop smears and becomes furious. After flinging Mr. Hankey (who looks like a normal piece of poo to everyone else) at Cartman and slipping more poo into Mr. Mackey's coffee, Mackey declares Kyle a "clinically depressed fecalpheliac on Prozac" and has him committed.
Ultimately, the school Christmas pageant is stripped of all semblance of Christmas, as it is all deemed offensive by someone. Instead, the children present a minimalist song and dance created by Philip Glass. The parents, horrified by the terrible pageant, begin blaming one another for destroying Christmas, and a fight breaks out. Finally, Mr. Hankey reveals himself to everyone, restoring the spirit of Christmas. The town releases Kyle and apologizes to him, and they all watch Mr. Hankey fly away with Santa Claus. After the boys wonder what feels missing, Kenny cheers as "The End" appears over him, having not died through the episode. As the end credits roll, Jesus appears, alone and singing "Happy Birthday" to himself, as a result of religion being banned.