The Freedom From Religion Foundation says the banner violates the Constitution because it was put up by members of the local fire department and hangs from two town-owned light posts over a county-owned road.
The banner was paid for by a Knights of Columbus group. Officials say a similar banner has hung over the town about a dozen miles south of Philadelphia for the past 50 years.
Freedom From Religion says the banner should be moved to private property.
Some agree, but most residents Action News spoke with are OK with the banner.
"I think the sign is fine. Christmas means Christ, it's Christ's birthday," Mike Downham said.
"It's Christmas, it's Christmastime, Christmas holiday, you should have a right to express that," Louis Kramer said.
"As an atheist, I do find that offensive," Zackery Wolfe said.
The mayor says he's asked a town lawyer to look into the situation.
Photo Courtesy: The Courier-Post