S.C.
Hello Casondra,
Before you make an official report I think you need to try to handle it from within the family. Once the state gets involved things can turn ugly. Maybe that's the route you'll need to take eventually but you should try to resolve it first. The big player here is your husband. This are his blood relatives and since your MIL doesn't exactly like you than you're not going to have any pull. One question I had was if the little sister is 9 why would there be a urine smell? Is this from animals? I think you're husband needs to sit down with his mom and tell her what's up. Including if things don't change that he will take further action.
Don't worry about hurting anyone's feelings. You have every right not to have your child in that situation. And take into consideration that I'm a smoker. I have kids (well their big kids now) and my husband and I both smoke outside.
I think the suggestion to have everyone to your house is fine. Again.. DON'T WORRY ABOUT HURTING FEELINGS. If she CHOOSES to not come because it's not at her house then that's her choice. It's a sad one but still her choice. I think MORE people need to stand up for children and the adults need to just shut up and act like adults!
Good Luck Casondra~