Does this mean 'my sister is physically in the school building' or something like 'my sister goes to school' (or both)?
Until a native speaker chimes in with a better (correct) answer: I think it means both "My sister is (physically) in (the) school (building)" and "My sister is (enrolled) in (and attends) school". However, to say my sister 'goes' (in a similar meaning to the latter sentence) to school is probably better phrased as "Moja siostra chodzi do szkoły".
Didn't you ask it before? I don't know, it just isn't. And a native speaker probably wouldn't even imagine such a form. ł -> l is quite a common change and I guess it happens in all words ending with -ła when they change to Locative.