We have a service-oriented online business (online ads). However, we want to start offerring webhosting/dedicated server hosting.

Anyone know if this is legal (offerring an entirely different online service)? I know this can be resolved by filling out some papers at City Hall and contacting our merchant account bank, etc., but it's a hassle.

I think you really need to call your city/county business departments to find out if it's legal or not. Business licenses and associated laws are usually more of a local issue than a global one. If your business license says something general like "Internet Services" you might be okay, but you'll never know until you ask the final authority. I doubt anyone here can give you anything but opinion.

Filling out papers at City Hall is a hassle, but it's a necessary hassle if you're serious about your business. If you just want to dable in web hosting to see what it's like you an always try it, then if City Hall finds out and doesn't like it you'll have to pay a fine.