As was mentioned previously, the physical significance depends on the application. Maybe this explanation will help.
Let V be a three dimensional vector space with basis {e1,e2,e3}, and let W be a four dimensional vector space with basis {f1,f2,f3,f4}.
Then V tensor W is a 12 dimensional vector space with basis
e1 tensor f1
e1 tensor f2
e1 tensor f3
e1 tensor f4
e2 tensor f1
e2 tensor f2
e2 tensor f3
e2 tensor f4
e3 tensor f1
e3 tensor f2
e3 tensor f3
e3 tensor f4
Furthermore, V direct sum W is a 7 dimensional vector space with basis:
(e1,0)
(e2,0)
(e3,0)
(0,f1)
(0,f2)
(0,f3)
(0,f4)
See the difference?
In Quantum Mechanics, spin is often considered. There is spin up and spin down. Sometimes the spin state is tensored with a wave function. Then, we have
wavefunction tensor spinstate=(wavefunction+,wavefunction-).
-Reverie