Yikes, OP. I have to say, although I understand that the dress is expensive and damaged, you're clearly not doing a very good job of raising a kind and considerate person. And that's not shocking, because, believe it or not, you absolutely have a say in what your kids wear. The fact that you don't see anything wrong with your child flaunting her expensive clothes in front of her cousins (which she clearly is doing on purpose, since you said you explained to her why it could be perceived the wrong way.) is very telling of your own parenting style.

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I would have yanked my kids out of that lunch so fast if I heard her say something like that. You best believe she wouldn't have seen that pink dress again, too. You're in charge of making sure you raise not only a smart person, but a good person. Your sister doesn't owe you jack and your kid deserved that. I can't even imagine what she says when adults aren't there.

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Try punishing her or something. YTA