This an infinite universe. It's inside Toad's brain. That means this is a part of Toad's imagination. After Toad got angry with Sanic & Luigi, he sent them here. This place looked all weird with everything being a Toad image. There are tons of Toad boxes. There was a Toad moon. There are even Toad worlds. Toad sent them both in a box for a whole day. Sanic was able to teleport out of this universe, but Luigi was screwed.