I'd tell the kid that I don't believe in Santa. And then I'd ask what he thinks. When the kid asks why I don't believe, I'd tell him that I don't know, that maybe it's a grown-up thing. After a certain age you just stop believing in Santa. And then I'd ask what he thinks.
This situation has actually happened, it was with my youngest brother. It was quite interesting to listen to his thoughts. According to him, Santa doesn't live in the North Pole. In fact,here is one Santa for each country, and they switch countries each year. That way they will meet all the children eventually. I guess this was his way to explain why Santa looked different from the year before. ^^
True, but I don't say "aww it looks great, thank you!" when my nephew gives me stuff. I say "thank you! Wow, you must have worked really hard making this, huh?" because that is the truth. He worked his ass off to make that for me, so I say thank you and take it back home with me with a smile on my face.
So what you're saying is that if the gift is ugly-looking I cannot appreciate the gift? Are you the kind of person who wouldn't want anything else but beauty around you, and if a gift looks like shit you don't want it? Wow, how superficial of you.
I happen to like to receive gifts that were handmade by the one who gives it to me, no matter how it looks. But hey, maybe that's just me. ^^