I think it is very noble of you to look out for your sister-in-law and want to be there for her. But there is a bigger picture that you need to keep in mind also, not just the issue of yes/no telling her mother. She is underage so there are legal ramifications for her, and depending on where you live, possibly also for yourself if something should happen to her and you were aware that she was drinking and kept the information to yourself (child endangerment laws).

I began my 18 year drinking career at 11. My mother did not handle such things well. I didn't/couldn't talk to her about stuff in my life for a variety of reasons, and when she did 'find out' about stuff, she handled things badly.

My advice to you is, if you think your mother-in-law would handle the situation well, as in not go off the deepend over it etc, then tell your sister-in-law that if she thinks she is old enough for the responsibility of drinking alcohol, then she is old enough for the responsibility of telling her mother - but offer to be there/have your m-i-l come to your house to talk/meet at coffee shop. If you don't think your m-i-l would handle it well, then say the same to your s-i-l, that if she thinks she is old enough to drink, then she is old enough for the responsibility of talking to the school counsellor about it (or whoever would be in a similar position at her school). Again, offer to go with her. The point is, either her mother OR her school need to be aware for her safety, because as a child (which at 14, not matter how mature/worldly etc she acts, she is still a child) she needs protecting, from others and from herself. And if her mother finds out about your involvement later, you will have demonstrated that you have acted responsibly with her daughter's safety and well-being foremost.

Most of all, as I'm sure you are well aware if you have a alcohol/substance abuse background, do not fall for her tricks to downplay or minimise or justify or rationalise or normalise her usage. There is more than one reason why governments set legal drinking ages above 14. I have a level of brain damage that will never be undone. Do not let that happen to her.

Good luck,
kp