They just didn't care

There are three separate RAM flags which the game uses to track the state of debug mode: the debug cheat flag, the debug mode flag and debug placement mode.

• The debug cheat flag is set when the player correctly inputs the debug cheat code, and is only cleared by a hard reset.
• The debug mode flag is set when the player holds down the A button during level load, but only after the debug cheat flag has been set. It is cleared at the SEGA screen.
• Finally, debug placement mode is set when the player presses the B button during a level, but only after the debug mode flag has been set. It is cleared when the player presses the B button again.

Sonic 3 and Sonic & Knuckles disagree on a few things regarding these flags. In Sonic 3 for instance, the debug cheat flag is set at the same time the level select is unlocked, but it has a separate cheat code in Sonic & Knuckles.

In particular though, just as with past Sonic games, Sonic 3 activates the debug HUD as soon as the debug mode flag is on, whereas Sonic & Knuckles waits until debug placement mode is also on, something which I've used extensively in the past to easily differentiate between S3A and S&K screenshots.

Of course, once the player exits object placement mode, the game must now restore the regular HUD. It can't just draw the score counter over the debug display, because any empty digits in the score counter would leave behind part of the debug display; it needs to wipe the whole thing clean first and draw the counters back in afterwards.

To that effect, the object placement exit code calls the HUD_DrawInitial function, which is used to initialize the HUD at level load. This is why the timer temporarily reverts to 0:00 until the next second rolls over.

    moveq   #0,d0
    move.w  d0,(Debug_placement_mode).w
    move    #$2700,sr
    jsr     (HUD_DrawInitial).l
    move.b  #1,(Update_HUD_score).w
    move.b  #-$80,(Update_HUD_ring_count).w
    move    #$2300,sr
    lea     (Player_1).w,a1
    move.l  ($FFFFFFCA).w,$C(a1)
    move.w  ($FFFFFFCE).w,$A(a1)

Unfortunately, nobody bothered to test this change in Competition mode. The regular HUD is never meant to be shown here, and so when HUD_DrawInitial is called, something goes wrong, and the player object is never properly restored, permanently removing them from the game.

This oversight definitely makes my Top 5 Stupidest Bugs in Sonic 3 list, since it makes debug mode totally useless in the Competition stages. Not only can you never interact with the items you place, but you can't even use debug mode's most basic functionality, free movement, because you can't place yourself back at the new position. Sheesh.