Do I tell my sister that her son is using?

I don't see that you have a choice about what to do. If I were you, I would do all of the above. Talk to your nephew and try to get him to go for help, but you also need to talk to your sister and let her know not only that her son is using drugs but also that you have talked to him. If someone doesn't expose his use of drugs, he will just get more dependent on them. If you make someone mad and upset with you, at least you will be able to live with yourself knowing that you tried to help.