I've actually been exploring this question with my wife, as my boys are almost-3 and nearly-2, and old enough to recognize the visage of Santa, if not be fully aware of his story. So the issue will arise probably in the next year or two, not because it will be the Moment of Truth for Santa, but because that's when they'll understand well enough that we'll need to know how to treat him.
What I know for sure is I don't want to lie to them outright, and try to sell them on a fiction contrived from a hundred-year-old poem and a Coke campaign. Neither do I want to compromise my credibility later in life when I talk to them about real faith and expect them to distinguish between "you can't see Jesus but He's real" and "you can't see Santa but he's real, except oh wait, no he's not".
I also have the real story of Saint Nicholas to fall back on, so they will know there's a real story behind the man, and that he represents the spirit of Christmas because he gave to others in secret. One other thing that helps is that VeggieTales did a video about Saint Nicholas, telling the story of the real man while working in some of the imagery associated with the modern American Santa. So that might present an opportunity for me to educate them at an even earlier age.
Both of them are very clever already, and Nathaniel in particular has a very active imagination. So I may just behave around them the way I do around grown-ups: talk in "real" terms about Santa but with tongue planted firmly in cheek, and maybe they'll play along with it. But I WON'T try to convince them that the Santa and the elves and the reindeer and such are really really real.